An innovative means of protecting your business or a means of stifling innovation?
Restrictive covenants have been thrust into the spotlight with the Government’s announcement that it is concerned they may be stifling…
Restrictive covenants have been thrust into the spotlight this week with the Government’s announcement that it is concerned they may be stifling British entrepreneurship. It appears that this fear stems particularly from those clauses in some contracts of employment that attempt to prevent people from starting up their own business or joining a competing business on leaving employment.
Understandably many employers are eager to protect their business from former employees being able to take advantage of the knowledge, contacts, strategy and other information gained during their employment for the benefit of another organisation or to set up their own business. Accordingly many contracts of employment, especially those for senior employees or those employees with access to clients, customers, and/or technical data, contain some restrictive provisions.
Typically the restrictions will attempt to prevent a former employee for a set period of time after their employment ends from doing some or all of the following:
- joining a competitor (current or prospective) or setting up a competing business (non-compete) either generally or in a specific geographic area;
- soliciting business from clients or customers;
- dealing with clients or customers;
- encouraging their former colleagues to leave the organisation or employing them; and
- encouraging suppliers to stop dealing with the employer or to change the terms on which they do so.
These types of clauses should not be mistaken for those that protect intellectual property rights, trade secrets and confidential information to which different rules apply.
Any clause which attempts to restrict what an employee is able to do after their employment comes to an end is potentially a restraint of trade and therefore unenforceable. However, employers are able to protect their legitimate business interests and clauses which do no more than protect those business interests (both in terms of the activities being restricted and the geographical range of the restriction) are likely to be enforceable.
For this reason it is generally the case that:
- non-compete provisions are more difficult to enforce than non-solicitation or non-dealing provisions; and
- provisions which cover a large geographical area are less likely to be enforceable unless the employee is legitimately working in that area;
although each case will turn on its own facts.
When drafting clauses which may be viewed as a restraint of trade, the starting point should be to identify what interests you are trying to protect and what the risks to the organisation would be if a specific employee or an employee in a particular position were to leave. This is likely to vary from employee to employee and therefore to increase the possibility of enforcement, employers should steer away from generic restrictive covenants which apply to all employees or a wide variety of employees. What is reasonable for a salesperson is unlikely to be reasonable for a member of the accounts team. Distinguishing between employees at different levels (and sometimes those at the same level who in practice have different client or customer relationships) and in different roles, may help to persuade a court that you have genuinely and reasonably sought to protect your interests.
Restrictive covenants are usually only considered at either the start or the end of the employment relationship. However, the reasonableness of a restrictive covenant will be judged as at the time it is entered into. You therefore need to be mindful that when employees change roles the restrictive covenants in their contract of employment may no longer be appropriate. Equally restrictive covenants which are not enforceable at the time they are entered into (for example because the employee is in a junior role) will not become enforceable over time as an employee’s role and responsibilities change. It is therefore advisable to revisit restrictions on each promotion or change of role.
Whenever you are recruiting you should have at the forefront of your mind that the prospective employee (especially those being recruited to senior and/or client or customer facing roles) may be subject to restrictions which prevent them from immediately joining your organisation or restrict what they are able to do when they join. Prospective employees should be asked whether they are subject to any restrictions. Where they are, or may be, you should ask for a copy of their contract of employment so that you can assess the position yourself. A former employer may attempt to prevent you from employing someone in breach of their restrictions and/or recover damages from you for any losses incurred as a result. Where you have any concerns that a prospective employee may be restrained from joining your organisation or from undertaking the role for which they are being employed, you should take advice on the specific risks.
Please speak to us if you are concerned about what your employees are permitted to do once they leave your employment or if you have concerns about the activities of a former employee. We are increasingly seeing employers taking steps to enforce restraint of trade provisions and it is certainly not the case that these can simply be ignored.
Claire Hollins (firstname.lastname@example.org) is an Associate in the Employment, Pensions and Immigration Team based in Manchester. If you need any assistance in drafting, considering or enforcing post-termination restrictions, we are happy to assist. Please get in touch with Claire or speak to your usual Weightmans contact.