In the present economic climate businesses face many risks; customer default, product defects; supplier problems; terrorist threats; cybercrime, and even disruption caused by strikes. This article however seeks to give advice to employers on one specific and increasingly common risk; the risk posed by employees who decide to ‘jump ship’ and go and work for a competitor.
What can a business do to minimise the risk posed by departing employees who are intent on soliciting business from customers, poaching staff, or exploiting the use of confidential information?
2. The Need for Restrictive Covenants
During their employment employees are very likely to acquire confidential information and knowledge about their employer’s key business interests, including such things as the identity of clients, their requirements and pricing strategies. Consequently, when they decide to leave either to set up in business on their own account, or to work for a competitor, it is tempting for them to want to use this information.
To try and therefore protect employers from these threats, many incorporate post termination restrictive covenants into their employment contracts. However, the effectiveness of these restrictions depends on striking the right balance between (1) the right of employers to protect their legitimate business interests and (2) the rights of individuals to use their skills and knowledge for the benefit of themselves and/or their new employers.
Notwithstanding this very real threat posed by departing employees however, it is a surprising fact that many employers do not have restrictive covenant agreements in place with their employees. And there is a danger inherent in that, because if an employee’s contract is silent and contains no restrictive covenants, then there is nothing that an employer can do to restrain a former employee from competing against them. It is not possible to imply such a restriction into an employee’s contract.
3. The Starting Point
The general position is that restrictive covenants are void and therefore unenforceable on grounds of public policy because they are in restraint of trade, unless they protect a legitimate business interest and are drafted as narrowly as possible in protecting that interest.
Legitimate business interests which such covenants may protect can include connections with clients and customers, and prospective clients and customers, trade connections with suppliers, confidential information and the stability of an employer’s workforce.
4. Types of Restrictive Covenants
A restrictive covenant is a contractual clause in an employee’s contract of employment which restricts the post-employment activities of that employee for a limited period of time after the employment relationship ends, in order to protect the employers legitimate business interests.
Types of restrictive covenants can include non-compete, non-dealing and non-solicitation (in relation say to clients, prospective clients and suppliers), non- poaching (of staff) and non-disclosure of confidential information including trade secrets.
5. Reasonable Protection
A restrictive covenant which is wider than is reasonably necessary in order to protect an employer’s legitimate business interests is at risk of being unenforceable. It is therefore important that employers always carefully consider whether a covenant which is narrower in scope might still protect their legitimate business interests.
Factors affecting the reasonableness of such covenants will vary but may include their scope, duration, geographical location, the nature of the employers business, the nature and seniority of the employee’s role, and whether such covenants are usual in the sector.
If a covenant is drafted in terms that are broader than is reasonably necessary in order to safeguard those legitimate business interests, then it will be struck down and the employer will be left without protection.
Whilst therefore employers will understandably often want to draft these covenants in very robust wide ranging terms, so as to act as a deterrent, that has to be balanced against the need to ensure that the employer is not left without some form of protection.
6. What Type of Covenant is Appropriate?
This will depend on the business interests that the employer is seeking to protect. For example non-solicitation and non-dealing covenants may be sufficient to protect an employer whose principal concern is the protection of their customer contact lists.
Non-compete covenants however tend to be the most onerous for former employees, as they can severely limit the ability of an individual to make a living for the duration of the covenant period. Accordingly, they are the most likely type of covenant to be found in restraint of trade, and are therefore the most difficult types of covenant to enforce. It is always preferable to seek to protect legitimate business interests through the use of non-solicitation and non-dealing covenants.
7. The Length of the Covenants
A shorter covenant will benefit the former employee, although a covenant with a longer duration will usually be desired by an employer as this gives them more time to protect their legitimate business interests.
Accordingly, employers must take care in balancing the need to protect their business with the value of enforceability. A covenant which cannot be enforced because it is too long in duration will be of little assistance to the employer.
It is common practice for such restrictive covenants to apply for restrictive periods between 6 and 12 months. A period of restraint in excess of 12 months will usually be unenforceable. Covenants at the longer end however are more likely to be reasonable for senior employees, although whether a restrictive covenant is enforceable will depend on the particular circumstances of the case.
8. The Nature of the Covenant
Generally non-solicitation and non-dealing covenants should be limited to those clients with whom the employee had contact during a specified period immediately before the termination of their employment, in order to be enforceable, because that is usually sufficient to protect the legitimate business interests of the employer.
In non-compete covenants, the advantage of a covenant which identifies the territory in which the employer conducts its business is helpful, as it leaves little room for doubt as to the area in which the activity is to be prohibited. Geographical restrictions will also limit the covenants scope, thereby potentially improving its enforceability. However, territory specific non-compete covenants with geographical restrictions may not always be appropriate for some businesses.
Read Part 2 here.
For guidance and advice on implementing a Restrictive Covenant please contact the Peninsula Advice Service on 0844 892 2772.