Should you worry about restrictive covenants?
Employers are seeking advice about the enforceability of their restrictive covenants against their former employees.
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. For this reason many contracts of employment, especially those for senior employees or those employees who deal with clients and customers, contain some post termination restrictions.
In recent months, we have seen an increase in the number of employers seeking advice about the enforceability of their restrictive covenants against their former employees, as well as those said to apply to potential new recruits.
So is this something you genuinely need to worry about?
Frequently, disputes about post termination restrictions result in solicitors’ correspondence between the employers and rarely end in actual litigation. However, if litigation is the result, this can be time consuming, disruptive, and costly to the business. Therefore, employers need to consider whether there is a genuine potential claim to be brought or to defend. The greater the risk to the business the greater the potential for litigation, especially where there are large sums of money involved or potentially involved.
Whenever you are recruiting (especially for senior and/or client or customer facing roles) you should have at the forefront of your mind that the prospective employee 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 and, if they are or may be, you should ask for a copy of their contract of employment so that you can assess the position. A new employer can be caught out if these restrictions are enforceable and they have induced/procured the breach or benefitted from the breach by their new/potential employee. The new employer will frequently be targeted as a potential defendant because this is disruptive to their business and they are more likely to be able to meet the costs of litigation and any award of damages.
When an employee resigns, you should consider what their contractual terms are, what the risks to your business may be, and what steps you may need to take (and are able to take) to protect your business. This may include a period of garden leave and reminding the departing employee of their post termination obligations in the first instance.
Typically, post termination restrictions will attempt to prevent a former employee from doing some or all of the following for a period of time after their employment ends:
- joining a competitor (current or prospective) or setting up a competing business 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.
When considering the enforceability of post termination restrictions (whether you are looking to enforce these or planning to recruit an employee who is subject to them) the starting point is that 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. This means that clauses which do no more than protect those business interests (both in terms of the activities being restricted, the length of the restriction and its geographical range) 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.
However, each case will turn on its own facts
When looking at enforceability you need to consider what interests the employer is trying to protect and what the risks to the organisation are when the employee leaves. This is likely to vary from employee to employee. Therefore, generic restrictive covenants which apply to all employees or a wide variety of employees may indicate that the restrictions will not be enforceable. 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 be persuasive that the employer has genuinely and reasonably sought to protect its interests.
Whilst restrictive covenants are invariably only considered at either the start or the end of the employment relationship, the reasonableness of the covenant is judged as at the time it is entered into. 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. Therefore when considering the enforceability of the restrictions you need to look at the employment history and the contractual terms over the employment period.
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. 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. Equally, 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, please speak to us.
Claire Hollins (email@example.com) is an Associate in the Employment, Pensions and Immigration Team and is based in Birmingham. If you have any questions or concerns please do not hesitate to contact Claire, or speak to your usual Weightmans advisor.