What happens if one of my former employees breaches their Restrictive Covenant?

Alan Price – Chief Operations Officer

May 26 2015

In the present economic climate businesses face many risks; customer default, product defect, supplier problem, and even disruption caused by strikes and snow.  This article seeks to give advice to businesses on what steps, if any, can be taken, once an employee leaves and either defects to a competitor or sets up on their own in competition.  Both scenarios represent a risk to the business, particularly if that employee is intent on soliciting business from customers, poaching staff, or exploiting the use of confidential information. This practical guide will hopefully be of some help to businesses facing such a threat. 1. Is the restrictive covenant a contractual term? The business will need to firstly check to make sure that the restrictive convent, that they are hoping to enforce against their former employee, was a term of the employment contract.  Notwithstanding the very real threat posed by departing employees, who have valuable knowledge of their employers business and clients, it is a surprising fact that many businesses do not have valid and binding restrictive covenant agreements in place with their employees. Such agreements should be a term of the employment contract, they should be regularly refreshed and updated, and businesses should also secure an employee’s express consent to them; they should not merely rely upon an employees implied consent. 2. What were the circumstances of the employee’s departure? If an employee’s departure amounts to a wrongful dismissal, then the restrictive covenant ceases to be effective.  For example, if a business pays the employee in lieu of their notice pay when there was no specific term in the contract of employment permitting this, then employment has ended in breach of the contract. In these circumstances, the contract of employment ends, and with it, the effectiveness of any restrictive covenants. 3. Does the restrictive covenant agreement amount to an unreasonable restraint of trade? On the assumption that the business is able to clear the first two hurdles, this is perhaps the most fundamental of all the issues to address.  If the clause that the business is seeking to enforce amounts to an unreasonable restraint of trade, then it will not be upheld if challenged.  And that will make it much more difficult to curtail the former employee’s activities, thereby putting the business at risk. Some of the many issues that a business will need to consider at this stage include:- 1. What does the restrictive covenant mean? 2. Does it seek to protect legitimate business interests i.e. client connection, maintaining a stable workforce, and restricting the disclosure of confidential information? 3. Is it no wider than is reasonable in scope, geographical extent and in duration? 4. Has it been refreshed and is it up to date? If the clause is broader than is reasonably necessary to safeguard those legitimate business interests, then it will be unenforcable. Whilst therefore businesses will often want to draft these agreements 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 business is not left without some form of protection, in the event that it needs to seek to enforce its terms against a former employee. 4. Is there a garden leave clause in the employee’s contract of employment? Most employment contracts will state the minimum period of notice that should be given in the event that either party wishes for it lawfully to come to an end.  If therefore an employee, particularly a relatively senior one in a customer facing role, hands in their notice of resignation, a business should always embark upon damage limitation. And that might include:- 1. Placing the employee on garden leave immediately. 2. Requiring them to surrender their company laptop, documentation and mobile phone. 3. Instructing them not to contact customers, suppliers or their colleagues. 4. Monitoring social networking sites. 5. Interviewing other employees to find out what the employee’s intentions might be. 6. Holding an exit interview, when the extent of the restrictive covenant agreement, and the businesses intention to robustly enforce its terms, is made clear. 5. What action should be taken if a business believes that a former employee is in breach of their restrictive covenant agreement? Here are some further practical steps that a business can and should take: 1. Don’t rely on office gossip.  Undertake an investigation and obtain some credible evidence. Hire in a computer expert to interrogate the former employees work computer, and speak directly to those customers whom they have contacted. 2. Realistically assess the impact on the business and the loss already sustained or likely to be sustained.  Make sure that the substantial time and money involved in any forthcoming legal action will amount to a worthwhile investment. 3. Write to the former employee (and their new employers if appropriate) with a “warning shot across their bows”.  Set out not only the terms of the restrictive covenant agreement, but also the evidence of the breach. They should also be required to sign an undertaking or give written assurances confirming their willingness to abide by the terms of the restrictive covenants.  And if there is no response by a set deadline, then this can be used as further evidence in support of possible legal action. As always of you require advice on this issue then contact any member of the Peninsula Advice Service who will provide you with the advice required - 0844 892 2772. 

Suggested Resources