Employers often
incorporate post-termination obligations
into an employee’s contract of
employment whereby an employee agrees
not to do certain things after he or she
leaves the company. These obligations
are called restrictive covenants. They
are designed to protect the employer’s
business and are particularly common in
the contracts of employment of sales
staff who have access to and intimate
knowledge of an employer’s customer
base.
There are broadly
four types of restrictive covenant:
-
non-compete
covenants – which seek to prevent an
ex-employee from directly competing
or working for a competitor, usually
within a specific geographical area,
for a set period following
termination;
-
non-solicitation/non-dealing
covenants – which seek to prevent an
ex-employee from entering into
working relationships with former
customers, by seeking or accepting
orders for goods and services, for a
set period following termination.;
-
non-poaching of
employees – which seek to prevent an
ex-employee from recruiting former
colleagues for a set period
following termination;
-
restrictions on
the use of confidential information
– which seek to prohibit the use of
any confidential information
(usually identified by a
non-exhaustive list of examples)
acquired by an employee during
employment.
On the one hand
employers will be understandably
concerned to protect their business
interests. On the other hand some types
of restrictive covenants seek to impose
unreasonable restrictions on employees
which on the face of it would seriously
prevent them from operating in the
industry in which they are experienced.
There are clearly two sides to the
argument.
The Employer’s
Perspective.
Employer’s must bear
in mind that restrictive covenants must
go no further than is reasonably
necessary to protect their legitimate
business interests as otherwise the
covenants will be unenforceable. However
this fairly simple statement disguises
the complex considerations involved in
defining what is “reasonable” and what
is a “legitimate business interest” in
any given circumstance.
For example, a
covenant which prevents an employee from
working for a competitor for a period of
twelve months anywhere within the United
Kingdom may be enforceable against a
national sales director but would not be
appropriate for, say, a hairdresser who
only deals with people in the immediate
locality.
Further, this is not
simply an issue about ideas of perceived
status. A ten mile geographical
restriction might be appropriate for a
hairdresser working in a rural area,
whereas the same restriction placed on a
vet (or indeed a solicitor) working in
an urban location might well be
unreasonable.
A further example can
be found in covenants against the
poaching of former employees. A sales
manager might be legitimately prevented
from recruiting members of his former
team for a period after his employment
ends. However, if the restriction
extended to all employees, including the
office junior, it would be difficult for
the employer to argue the restriction
was reasonable, and went no further than
required to protect legitimate business
interests.
Leverage.
The issues that need
to be considered in relation to
restrictive covenants will vary
considerably from case to case and from
employee to employee and, as usual
employers are advised to seek
professional guidance. The point is that
covenants can work to protect an
employer’s business.
They provide leverage
even if an employer would rather not
pursue the matter to a full court
hearing or application for an
injunction. They can be used as a
cornerstone in termination negotiations
with ex-employees. Details of the
covenants can even be sent to an
ex-employee’s new employers to place
them on notice that any breach of the
covenant by the former employee could
also give rise to a claim of “inducing a
breach of contract” against the new
employer.
However, the covenant
must have, at least on the face of it,
some chance of being enforced if it is
going to be taken seriously by the
ex-employee or his new employers.
The Employee’s
Perspective.
Denying an individual
the ability to work and make a living in
an industry in which they are
experienced and in which they have
developed a specific set of skills is
not something which would ever be done
lightly by the courts. Accordingly,
covenants which seek to prevent any form
of competition with a former employer
are rarely enforced.
Also worth bearing in
mind is that if an employer terminates
the employment relationship wrongfully,
for example, by failing to follow
contractual disciplinary procedures or
by failing to give due notice under the
contract, then the covenants will
automatically become unenforceable,
whether reasonable or not. An employer
may make a payment in lieu of notice but
this will not necessarily preserve the
enforceability of the covenants,
especially where there is no express
right to make a payment in lieu of
notice under the employment contract.
Where an employee
leaves of their own accord the situation
is different. However, the covenants
still need to be reasonable to be
enforceable. For example, a covenant
prohibiting an employee from soliciting
the business of former customers with
whom they were regularly involved is
more likely to be enforceable than a
covenant which simply prohibits contact
with any of the former employer’s
customers, many of which the employee
may never have had contact with.
Conclusion.
There are simply no
hard and fast rules other than the old
maxim – never enter into a contract
unless you know exactly what you are
agreeing to. Professional advice is
therefore a pre-requisite. It is often
better to enter into a contract
containing draconian covenants which are
likely to be unenforceable, than to seek
to have the restrictions reduced to the
point where they become more reasonable
and capable of being enforced.
At the end of it all
restrictive covenants are a bit of a
game – the winners being the ones who
best know the rules.
The Interactive
Law Group