Protecting Your Business – Restrictive Covenants

It is vital that you protect your business from unfair competitive threats.  Losing a key individual or even a team to a competitor can be extremely damaging to your business and can result in you losing clients, prospects and other staff.  Critical confidential business information may also be lost to other businesses.

There is a view that restrictive covenants in employment contracts are unenforceable.  This is wrong.  The Courts uphold them every day against the departed employee or team and also against the competitor business and they can form a critical protection to your business.

Due to their anti-competitive nature the Courts do take a critical view of any restrictive covenants you may seek to enforce.  It is important therefore that the covenants are well drafted and form a suite of protections to the risks your business faces when employees depart. 

Restrictions During Employment

The obligations should start the moment the employee starts working for you and can include obligations;

• To protect confidential information
• To act in the employer’s best interests at all times
• To report their own and others’ wrongdoing
• To disclose any information which may negatively affect the employer’s interests
• To protect intellectual property belonging to the employer

These obligations can be inserted into the employment contract and then exist throughout the lifetime of the employment relationship.  For example if the employee becomes aware of an approach by a competitor to poach a key individual or team, they are contractually obligated to disclose that to the employer enabling the employer to take action to protect it’s position.

Post-Termination Restrictive Covenants

Restrictive covenant are designed to protect the employer following the departure of an employee or team and typically include;

• A non-compete restriction designed to prevent the former employee from working for a competitor for a period of time
• A non-solicitation restriction is intended to prevent the former employee from seeking business from specific clients or prospects
• A non-dealing restriction prevents the former employee from having any business dealings with specific clients or prospects
• A non-poaching restriction prohibits the former employee from enticing certain employees away from your business
• A non-interference restriction will prevent an employee from seeking to interfere in your relationship with a supplier.

Covenants will usually be for between 3 and 12 months duration.

When considering the enforceability of these covenants a Court will apply various tests, including;

1. Does the restriction seek to protect a legitimate business interest?
2. Is the restriction reasonable to protect that legitimate business interest?  Including;
   1. Is the duration reasonable?
   2. Is the geographical coverage reasonable?
   3. The degree of interaction between the former employee and the particular client, employee or supplier.

The legitimate business interests can include protecting confidential information and trade secrets, your relationship with clients and suppliers and your desire to maintain a stable workforce.

Critically the reasonableness of the covenant is assessed at the point the contract is entered into, not at the point an employer may seek to enforce the covenant.  Many employers fall down when allowing their covenants to become out of date, for example because of promotions or changes in the business. 

They also make the mistake of using standard or template covenants for all staff.  Courts will assess covenants against the risks the specific employee poses to the employer and it will be for the employer to have identified these at the point the contract is entered into.

It is important therefore that employers and HR managers take the time to consider the risks posed by each employee before they issue the employment contract.

Enforcement

If a former employee breaches or threatens to breach a restrictive covenant in their employment contract it is important that the employer acts swiftly and decisively to minimise the risk to the business.

Although it can often take many months to reach a full hearing in any litigation employers can seek an interim injunction compelling the former employee to comply with their restrictive covenants.  This order can often be obtained within a matter of days but it is critical that employers act swiftly to obtain and preserve evidence of the former employee’s wrongdoing, for example evidence of the employee sending a confidential client database to a personal email address.

As well as pursuing the former employee it is sometimes also possible to pursue the competitor business in any litigation.  This is often desirable as the competitor business will often have deeper pockets and also be the ultimate beneficiary of the former employee’s wrongdoing.

How Can We Help?

Nockolds’ specialist Employment Team has decades of experience drafting and enforcing restrictive covenants.  We will often help to advise employers as they seek to recruit employees to ensure that the covenants are drafted reasonably and to protect the business as much as possible.  We can support HR managers through the negotiation of the employment contract with the incoming employee in an area that is often fraught with difficulty and commercial risk.

As and when an employee departs we can also act urgently to advise on the risk of a breach and to assist in enforcement action if that is required.

If you are concerned about protecting your business from unfair competition by former employees please contact our team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.