People are a key business asset, but once the relationship with an employee or contractor ends they may become a liability, threatening the business’s continued success. The right to work does not outweigh the right to protect legitimate business interests, but employers need to properly use the available safeguards to ensure their enforceability.
A business under attack!
Imagine this scenario: your company spends years training and developing Jane, a star and senior employee. Jane designs a best-selling product and grows a team of talent to support her. She has access to your marketing databases, including details of prospective clients, and knowledge of all the secrets that make your business a success.
However, Jane left your business 6 weeks ago. You thought that she was taking up a challenge in a different sector, but she has just appeared - working for your key competitor. Worse still, she is in contact with your key clients and prospective clients and is apparently talking to members of her old team, encouraging them to join her at her new company. Suddenly, your business is under attack! What can you do?
Unfortunately, in today’s fluid employment market, this scenario is all too common. In this article we look at how the inclusion of some “restrictive covenants” in Jane’s employment contract may come to your rescue. We also consider other legal routes that may assist you, and finally, we suggest some practical steps to avoid this nightmare scenario becoming a reality.
What is a restrictive covenant?
Many consultancy and employment contracts contain clauses that restrict an individual’s working activity when the contract ends. These are known as restrictive covenants. They are intended to prevent or limit damage to a business by an ex-employee and so are also called “post-termination restrictive covenants”.
The most common types of restrictions in employment contacts are:
- Non-compete clauses –to prevent an ex-employee, such as Jane, from working for a competitor for the length of time specified in the clause.
- Non-solicitation of clients/customers clause –to stop an ex-employee from approaching customers/ clients to entice them away from you. Customers are free to choose to move their business from one company to another, but with this clause, Jane may be prevented from approaching your customers and encouraging them to follow her.
- Non-dealing clause –to prevent an ex-employee from any dealings with clients, customers, or suppliers, even if that person approaches the ex-employee first.
- Non-poaching of staff clause – should stop Jane approaching her former colleagues and enticing them to join her new company. This will help your company to maintain a stable workforce, which is a legitimate business interest..
Are restrictive covenants enforceable?
Hold on, you say, that all sounds good, but I have been told that restrictive covenants are against the law and unenforceable. Aren’t they a complete waste of time and money? Well, to a certain extent that is correct: a badly drafted covenant is not likely to be enforceable. However, a good clause, appropriate to the employee in question, may well be enforced by a court.
Usually a clause in an agreement that restrains trade and prevents an individual earning a living is against public interest and should not be enforced. But the law recognises that it is also in the public interest to allow businesses to legitimately protect themselves. Restrictive covenants may therefore be enforced if they are shown to be reasonable when considering the interests of all the parties.
What is a reasonable restrictive covenant?
To effectively use restrictive covenants to protect your business these should have the following characteristics:
- They should be in a written agreement between you and your employee/ contractor that is signed by both of you.
- They should clearly protect a legitimate business interest such as a trade secret or confidential information, a client data base or supplier terms, or the retention of other key members of your workforce.
- The restriction should be as narrow as possible in relation to the length of time of the restriction, the geographic area of restriction and the definition of the restricted activity. The exact extent of these will depend on the specific business interest that you are trying to protect and may vary from case to case.
- They should be reviewed and altered if the employee is promoted.
What if an ex-employee ignores a restrictive covenant?
If it becomes clear that your ex-employee – in this example, Jane – has disregarded the terms of her contract with you, you need to act quickly to limit the damage to your legitimate business interests. An appropriately worded letter often produces the desired result. If this does not work, a court order, called an injunction, may be applied for urgently. An injunction may stop Jane from actions such as working for your competitor, using your data, or calling your clients, or it may compel her to do certain things such as returning your documents and data.
However, an injunction may only be obtained at this early stage if there is real urgency and if financial compensation at a later point will not be adequate to cover the damage that your business will suffer if the action takes place. Delaying by even a few weeks could mean the injunction is not granted because a high degree of urgency is not demonstrated.
How effective is an injunction?
If you prove that the restrictive covenants in your agreement with Jane are enforceable, and the court grants you an injunction, Jane should take this seriously. If she fails to comply with the injunction she will be in contempt of court and may be imprisoned for up to 6 months.
You may also join Jane’s new employer – your competitor – in the court proceedings, as well as any of your staff members who appear to be conspiring with Jane to join your competitor. This may effectively prevent further unlawful activity by all those people.
What if my business has already been damaged?
Damages to compensate any loss may be claimed from your ex-employee. Strategically, if that ex-employee will not be able to pay this amount, stopping the damage in the first place by an injunction will be the best course of action. If Jane’s new employer knew about the restrictions and encouraged her to break them, it may be possible to bring a separate claim against that company – which may have deeper pockets.
What if you have no restrictive covenants or they are unenforceable?
Restrictive covenants are not the only way to protect your business from ex-employees. There is an implied duty good faith in all employment relationships, and a duty not to use or disclose confidential information gained in the course of employment. You may also demand the return of any information that Jane has retained information, and which belongs to you.
A court will also impose restrictions on Jane misusing or disclosing confidential information such as your trade secrets even though she is no longer in your employment. Your business is also protected by other intellectual property laws relating to your trademark and patent. Copyright law prevents Jane from copying written works created in the course of her employment, and the design rights for work created during employment continue to belong to you.
However, if you do not currently have restrictive covenants in your employment contracts please consider taking advice and introducing these at an appropriate point, particularly for key and senior roles. You may need to give affected employees salary increases or other compensation to show that you have been reasonable when introducing the restrictions, but this may be money well-spent to avoid damaging your business in the future.
Summary
Many employment contracts include restrictive covenants. These may discourage ex-employees from doing certain things that will damage your business, but they are only enforceable if they are reasonable and protect the legitimate interests of your business. There are other laws that protect your business from attacks by ex-employees, but well drafted restrictive covenants offer you the best protection before too much damage is done. Taking legal advice early will enable you to navigate a safer path to achieving a fair result from the end of an employment relationship.
PLEASE NOTE: a version of this article first appeared in Engineering Designer April-June 2023
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
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