27th April 2016

INFORMATION UPDATE

 Issue No.  2016/09

 Sentient
              

 

PROTECTING YOUR BUSINESS USING RESTRICTIVE COVENANTS

We often get ‘phone calls from our client asking how they can stop an employee who is leaving, from taking with them essential confidential information which is used to (as they put it) “nicking our business”.  It is a complex area but we hope the following comments may help shed some light.

A good starting point is to write Restrictive Covenants into employment contracts. These operate after employment has ended and typically seek to restrict an employee from working for a competitor, setting up in competition, poaching other employees or poaching clients/customers.

All well and good, but the problem is that these restrictions are difficult to enforce. By their very nature, they are anti-competitive and in restraint of trade with the basic position being that they are contrary to public policy and therefore void.  But all is not lost: if it can be shown that the restrictions do no more than is reasonable to protect legitimate business interests then they are potentially capable of being enforced.

What should they cover?
Points to consider: 

Ask yourself, is it appropriate to restrict a specific employee after employment ends from: 

  • Going to work for a competitor
    If so, is it appropriate to restrict the employee from working for specific competitors or competitors based within a specific geographical area? And within a specified period of time after employment ends? 
  • Setting up in competition
    If so, is it appropriate to restrict the employee setting up within a specific geographical area? And within a specified period of time after employment ends? 
  • Poaching other employees
    If so, is the restriction to prevent the employee from poaching any employee of the organisation or employees from a specific tier within the hierarchy, or from a specific department(s)? 
  • Poaching clients/customers
    If so, is the restriction to prevent the employee from ‘soliciting’ and/or ‘dealing’ with clients/customers?  Is it appropriate to restrict the employee from soliciting/dealing with all clients/customers, or just specific clients/customers, with whom the employee previously dealt with, or within a geographical area?  And is it within a specified period of time after employment ends? 

In considering the above, it is important to remember that the restrictions must GO NO FURTHER than is reasonable to protect the organisation’s legitimate business interests.  You will then have to justify why, for them to be enforceable. 

Ultimately a judge will determine the enforceability or otherwise of a restrictive covenant. What is “reasonable” and what is a “legitimate business interest” are open to interpretation and debate, depending on the circumstance and judges are not easily swayed on this.  To get protection, it is the employer who seeks to enforce the covenant with an application to court for an injunction and/or compensation. Therefore, it is the employer who will have to effectively justify to the judge that the covenant is reasonable and goes no further than is reasonably necessary to protect the employer’s legitimate business interests. 

So what do the courts accept as reasonable? 
A recent case is a good pointer.  The facts are summarised as follows:

  • Employee starts work in 1997 as a trainee.
  • Contract is issued shortly after starting in 1997, which included a Restrictive Covenant; specifically a non-dealing clause barring the employee from working with any of the employer’s existing customers for six-months after employment ends.
  • The employee continued in employment for 18 years. During this period, the employee had dealings with, and built relationships with customers and had experience of the customer base.
  • Employer did not reissue or update the Restrictive Covenant, so relied on the original Restrictive Covenant.
  • The court ruled that at the time the Restrictive Covenant was issued, it was unenforceable as the employee had no experience or customer contacts.

The court also ruled that:

  • because the Restrictive Covenant was once unenforceable, it remained unenforceable meaning the employer could not rely upon it even though the employee had by then built relationships with customers and become aware of sensitive information and the customer base, which the employer was seeking to protect; and
  • the Restrictive Covenant was drafted too widely being drafted to exclude dealings will all customers, not just those the employee had prior dealings with.

What does this mean?
Whilst covenants can be drafted to give employers every chance of success, unfortunately no guarantees can be given that employers will be successful in any such court application.  However, employers can give themselves the best possible chance, by reviewing the restrictive covenants at the point of issue (or if an existing employee changes job role) and consider whether it is appropriate to issue a restrictive covenant and that the terms are reasonable (not too wide) having regard to all the circumstances.

The future of Restrictive Covenants
Having said all of the above, the government fear the use of covenants are constraining entrepreneurship by preventing talented staff from striking out on their own. Consequently, on 24th April 2016, the government opened a consultation to investigate banning or severely restricting the use of non-compete clauses that specify where and how employees can work when they leave a business. 

Non-compete clauses are also used to ensure staff cannot take contacts or intellectual property from their employer to a direct rival – and we are concerned about the possible removal of these legal protections. 

The Government is inviting comments from both employers and employees, with a view to potentially outlawing the clauses entirely.  Consultation ends on 22nd May 2016 at 11:45pm.  More information on the consultation and how to make comments can be found at https://www.gov.uk/government/news/government-pledges-to-act-on-employment-rules-that-could-be-stifling-british-innovation


 

 

 

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