Restrictive Covenants

Every business has information that is private and integral to the running of the business – the kind of information that you would not want other businesses to know about. Whether it be contacts or business strategies, this information can be invaluable to its success. Protecting this information is important to your Business.

When an employee leaves, businesses want to protect this information: this is where restrictive covenants come in.

Also known as "non-compete" clauses or "post-termination restrictive covenants", employers include these clauses in employment contracts for a number of reasons, including to:

  • stop employee's using information gained at their old workplace in their new job
  • restrict the employee's ability to start up a business that competes with their ex-employer
  • prevent the employee "poaching" their previous employer's contacts and/or clients provide a time limit on all the restrictions
  • limit the area, geographically speaking to which the restrictive covenants apply.

Protect your business interests – update your contracts 

Restricting the use of this information by employees after their employment has ended may be vital to the protection of your business or customer contacts.

Ideally, business owners should require all new employees to enter into an employment contract when they start their new job and it is a legal requirement for an employer to issue an employment contract within two months of an employee starting work. The beginning of the employment is the time to consider carefully the potential "damage" an ex-employee might do should they leave the business – and to include appropriate restrictive terms in the contract.

Without these covenants, the business could be left wide open to "attack" by an ex-employee – with no means of redress.

Managers/Executives/Bankers & Brokers

Employees in some roles have access to particularly sensitive information. Executive, management, sales, banking, broking and senior staff members often have non-compete clauses in their contracts of employment where issues of potential competition increase in sensitivity with seniority.

However, care should be taken with drafting the non-compete clauses: the "one-size fits-all" approach to restrictive covenant clauses can risk the clause becoming unenforceable if it is not appropriate for the particular employee. Employers must consider different restrictive covenants to ascertain whether or not they are relevant for a particular staff member. Careful consideration in this area is needed.

How to ensure restrictive covenants are enforceable  

To ensure a non-compete clause is enforceable, the following issues should be considered:

  • How long has the employee worked for the business?
  • What was the role?
  • How senior was the role?
  • What kind of information did the employee come into contact with?
  • What is a reasonable period of time to restrict the ex-employees activities after they leave?
  • What geographical area should the restriction cover?

Gardening leave as part of the contract  

So called "garden leave" is a term often bandied about. It often refers to a contract term that provides the employee will, for a certain period of time during their employment, often during their notice period, still receive pay and benefits. During that time, the employee, whilst not actively working unless requested to do so by the employer, is not be able to take up employment with a competitor because they are still an employee.

Gardening leave is essentially a way of restricting the activities of an employee. It keeps them "out of the business" and away from key contacts during their notice period. To have an employee on garden leave, it is preferable for there to be an express clause in their contract.

Have you found out that an ex-employee has gone to work for a competitor?  

If you find that an ex-employee has gone to work for a competitor, you can:

  • write to your ex-employee reminding them of the restrictions and ask for a statement or declaration that they will abide by the contractual restrictions; and
  • write to your ex-employee's new employer to provide them with a copy of the restrictions. Warn the new employer that you will take further action if you believe that the restrictions have been breached.

What can you do if an ex-employee is breaking a restrictive covenant?  

Apply for an injunction: if you discover that an ex-employee is breaking a restrictive covenant, you can apply for an injunction that requires the employee to "deliver up" or destroy confidential information. This means that you can ask the court to give an order to require the employee to stop immediately. Such an application must be made promptly. A court hearing will be set to allow the court to hear the full evidence at a later date in another trial.

If you claim that you have suffered financial damage as a result of the ex-employee's breach of the non-compete clause, you will need to show evidence of that loss. This will usually be a loss of clients and/or profits on contracts.

Action against the new employer: employers may choose to sue the new employer. This action warns the competitor and other competitors that contractual restrictions have teeth and will be enforced. Also the new employer is more likely than the ex-employee to have money with which to pay compensation if the court finds that the restrictions have been breached.

What can you do to enforce restrictive covenants:

firstly, speak to an employment professional who will advise on how to proceed in the circumstances.

Check your employment contracts  

A well-drafted employment contract can act as a deterrent to ex-employees and put them off taking client and contract information away with them – or setting up in competition.

Our employment team can advise you on appropriate clauses for your contracts depending on the type of employee: it is important to ensure that contracts are tailored to suit the particular employment set up.

We can also review your current employment contracts to ensure that they will stand up in court should an ex-employee take action that affects your business.

Examples of our work  

 

  • Advising two London City traders on how to leave their employment and go to work for a competitor without breaching their respective restrictive covenants.

  • Advising an employer who believe that an ex-employee had acted in breach of her restrictions

Can a court re-write restrictive covenants to bring them in line with common sense?  

No, the Court of Appeal held, in Prophet plc v Huggett.

Mr Huggett was the UK sales manager of a software company, Prophet and a post termination restrictive covenant was in place to prevent him from selling Prophet's software after he left.

Mr Huggett joined a competitor, which sold competing software but which was not, technically, Prophet software (as only Prophet sold Prophet software). Read literally, the restrictive covenant provided no protection to Prophet as nobody else sold their software.

The High Court held that the clause should be rewritten to give effect to the intention of the parties, to prevent Mr Huggett selling software which was similar to Prophet software.

The Court of Appeal disagreed. It was pointed out that a purposive approach could legitimately be taken where a restrictive covenants was ambiguous. But this one was not ambiguous - it was just badly drafted.

Need further guidance?  

For advice on Restrictive Covenants and employment contracts, contact susan.mayall@pearsonlegal.co.uk. or victoria.schofield@pearsonlegal.co.uk  or call us today.

 

Updated 30 July 2016