Employees with access to confidential information, such as customer details, strategic plans, products or financial details, can cause significant damage to employers when they leave, if they join a competitor or set up their own business.
Restrictive covenants are one of the ways to try and prevent this.
What are they?
Restrictive covenants are contractual clauses which aim to prevent former employees from carrying out certain activities that could damage their former employer’s legitimate business interests. However, their aim cannot be to prevent competition in itself. As such, they must be carefully drafted and tailored to the particular business and employee.
Types of restrictions
There are a range of restrictions an employer can consider such as:
-Non-compete clauses which prevent the former employee from working in a competing business.
-Non-solicitation clauses which prevent a former employee from approaching previous clients and customers for business.
-Non-dealing clauses which prevent a former employee from carrying out work for a client or customer (even if they have not directly solicited business from them).
-Non-poaching clauses which prevent a former employee from trying to recruit former colleagues to work for their new business or employer.
Limitations
Restrictive covenants should go no further than is necessary. Therefore, it is important that all restrictions are limited in terms of duration and scope. Generally, the longer the restricted period, the less likely they are to be enforceable unless there is something particular to the business that would justify it. Common periods for restricting employees are 3 or 6 months after the employee has left. It is also sensible to limit the prohibited activities so that a non-solicitation clause only refers to customers or clients with which the employee dealt within, say, 12 months before the termination of employment.
Imposing and introducing restrictions
Where it is appropriate to restrict an employee, restrictive covenants should be included in the contract of employment at the start of the relationship and employers should ensure that they keep a copy of the signed agreement.
Where a previously unrestricted employee is promoted or is given new responsibilities that means restrictions become appropriate, then it is important that the contract is updated to include these. An employer should also provide consideration in the form of a one off lump sum payment.
It is also important to note that where restrictions have been put into a contract at the outset when they would not have been appropriate or enforceable (due to the employee’s position), an employer will not later be able to rely on them should that employee’s responsibilities increase or their role changes. This is because the reasonableness of restrictions are judged at the time they are entered into.
Enforcing restrictions
Restrictions are enforced by way of an injunction. This is an equitable remedy and will only be granted where it is fair to do so. A court will assess the reasonableness of the restrictions and decide whether an injunction should be granted in all the circumstances. A court cannot change the wording of restrictions to be more reasonable (and therefore, enforceable).
Enforcing restrictive covenants is time consuming and expensive. The risk of needing to apply for an injunction will be reduced where the restrictions are properly drafted as this will minimise any argument that they are not enforceable.
Restrictions will also be unenforceable if an employer has breached the contract by paying the employee in lieu of notice when they do not have a contractual right to do so. It is therefore important that that the contract works as a whole.
Tips for employers
Consider: what business interests you need to protect. the employee’s role.
Ensure:
-restrictions are carefully tailored for that employee.
– that a pay in lieu of notice clause is included.
– that contracts are signed and copies retained.
-Review contracts to ensure that the restrictions still meet your requirements.
– Introduce restrictions for previously unrestricted employees if circumstances change.
If you need advice on how to protect your business, please get in touch with Claire Rolston or Yvonne Atherton at hello@clrlaw.co.uk or on 0191 6030061
