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Restrictive covenants

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Imagine the situation – you have a senior employee who has worked for your company for a long time. During their time with you, they have gathered a lot of confidential information including know-how, pricing lists and customer lists, as well as building good relationships with other members of staff and clients.  This member of staff decides that they want to leave to work for one of your competitors down the road. What can you do to stop them from taking all of the knowledge they have built up with you (and maybe even a few of your other employees), and using it to benefit the new company? This is where well thought out restrictive covenants can help. But these need to be thought of before “the horse has bolted” right at the start of the employment relationship.

So first of all, what is a Restrictive Covenant?

Post-termination restrictive covenants are clauses in an employee’s contract of employment which aim to restrict, or even stop, the employee from doing certain things (for instance – working for a competitor) after their employment has ended.

Why are Restrictive Covenants helpful?

Employees, particularly the senior ones, are likely to have a lot of information about customers, pricing, and the businesses’ plans. If the employee was able to give this information to a competitor this could be very damaging to your business.

Post-termination restrictive covenants are important to restrict employees from passing on knowledge of technology, customers, or information about the running of your business to their new employer or business.

When can you restrict employees activities after they have left?

The answer is – only in quite limited situations. So you should follow the following 10 useful steps to help you to make sure that the restrictive covenants will work as you want them to. If restrictive covenants are incorrectly drafted or are too wide, the whole clause will fail and your business won’t have any protection whatsoever.

Useful Steps

Identify which business interests you are trying to protect.

The first thing is to look at what you are trying to achieve by restricting your employee’s activities after they have left.

Examples may be that you do not want your employee to compete with the business, poach clients or staff members, or pass on confidential information and trade secrets.

It is important that you do this as you will only be able to enforce restrictive covenants against your employer if they do not go any further than is reasonably necessary to protect ‘legitimate business interests’. So you must identify a legitimate business interest in the first place.

Establish how long the restrictions should be in place, the region it should cover, and what the industry standard is.

How long?: You need to look at how long it is reasonable to keep an employee out of work to protect your confidential information and client relationships.

The longer the restriction is in place, the more likely it will be found that it is unreasonable and will not be allowed to be enforced against the employee, leaving you with zero protection.

A balance needs to be reached. A good starting point is “how long will the employee retain the damaging information or client relationships?” That will give you a good idea of a reasonable period.

What region?: Is it appropriate to restrict your employee from working all over the UK? Or would it be suitable to just limit them from working within a particular region?

The wider the restriction, the more likely it will be found to be unreasonable and unenforceable.

The more unusual your business the wider geographical scope you will be able to justify and vice versa.

Industry standard?: You should look into what the industry standard is in your particular area. Are you in a fast-growing industry or a slower growing industry?

If your industry is moving forward quickly with lots of developments, it is likely that a shorter restriction is more suitable.

  • What is your employee’s role?

It seems sensible that you wouldn’t use the same restrictive covenants for a junior employee as a Director of the company, as their skills and knowledge will be very different.

So you should make sure that your restrictive covenants are tailored to suit individual employees and are suitable to the size, market and scope of the company.

Top tip here is that sales guys, who build close client relationships, often require more robust restrictions.

  • Make sure that the defined terms are tailored to your company.

It is important to remember that there are no catch-all definitions that will cover every eventuality. So it is important to look at exactly what you want to protect and what you want to restrict the employee from doing.

For instance, it is vital that you think very carefully about which customer relationships you are trying to protect. Do your customers belong to your subsidiary company? If so, this must be included in the definition of the company.

Decide what you want to do and a solicitor can then sort the restrictions for you.

Also, with the growing popularity of the use of networking sites within the business such as LinkedIn and Twitter, it is becoming increasingly difficult to draw a clear line between the contacts that are business related and belong to the company, and those that are not. This is a developing area of law, and you should get some legal advice about this.

Make sure you review your restrictive covenants regularly.

Don’t forget that when an employee first starts with your company, they will sign their contract of employment, which may or may not contain restrictive covenants.

That employee may progress through the ranks and become a senior employee during their time with you. With this, it is likely that their knowledge of the business and your clients will increase. You should, therefore, make sure that if an employee is promoted, you review their restrictive covenants at that point.

A key thing to remember is that if an employee is going to take on additional restrictive covenants there needs to be something that is given to the employee in return – such as a pay rise or additional holiday. This makes it ideal that this is done at the point of promotion. Be organised.

Make sure that the employee must notify you if they are approached or are offered alternative employment

This is useful as it will give you an opportunity to look at whether you would like to try to talk the employee into staying with you by maybe offering additional benefits. This will mean that you may be able to prevent someone you would really like to keep from leaving employment and potentially taking other employees with them.

A clause to this effect can be drafted into the restrictions.

Think about including an obligation for the employee to provide to their new employer a copy of their restrictive covenants.

If the new employer is aware of the employee’s restrictions and these are breached, you may be able to go after the new employer for damages you suffer due to the breach. This may be helpful as the employer is likely to have more money than the employee to pay for the breach.

Make sure you include express provisions in the employment contract relating to suspension, garden leave, notice, termination without notice and payment in lieu of notice.

For example, problems can arise when an employer pays an employee in lieu of notice (pays the employment for their notice period without letting them work their notice period) when there is no express term in the contract to allow this.

Whilst it seems like the employee is getting a good deal by getting paid and not having to work, this is technically a breach of their contract. In this situation, an employee is entitled to see themselves as being released from their restrictive covenants.

Any breach of the contract may release the employee from their restrictions and so the rest of the employee’s contract should be drafted properly.

It is likely that a court would take into consideration any time that the employee must sit out before the termination of their employment (whether this be during a period of garden leave or their notice period). So this should be taken into consideration when putting the covenants together.

Finally, make sure that you take time to really think about the restrictive covenants you need

Yes, it is time-consuming to sit down and go through each of the above steps. But it really is true that a little bit of time spent early on will really pay off if you find that you need to rely of these restrictive covenants later down the line.

It is also vital that you take legal advice when it comes to drafting these covenants as the law is constantly changing and so you need to ensure that you are protected.

If you would like any advice in relation to post-termination restrictive covenants, please do not hesitate to contact our Employment & HR team for a free confidential chat.

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