Employees and contractors are vital business assets, but when their relationship with the company ends, they can become liabilities.
Imagine this: your firm spends years training and developing John, a star and senior employee. John creates a new team to support him. He has access to your marketing databases, including details of prospective customers, and knowledge of all the secrets that make your business a success.
However, John left six weeks ago. You thought he was taking up a challenge in a different sector, but he has just reappeared – working for a key competitor. Worse still, he is in contact with clients and is apparently talking to members of his old team, encouraging them to join him. What can you do?
Unfortunately, this scenario is all too common in today’s fluid employment market. The solution is to include some restrictive covenants along with legal measures in John’s employment contract.
What is a restrictive covenant?
Many employment contracts contain clauses restricting an individual’s working activity when the contract ends. These are known as restrictive covenants. They are intended to prevent or limit damage to a business by an ex-employee and so are also called “post-termination restrictive covenants”.
The most common restrictions in employment contacts are:
- Non-compete clauses – to prevent an ex-employee from working for a competitor for the length of time specified in the clause
- Non-solicitation of clients/customers clauses – to stop an ex-employee from approaching customers and clients to entice them away
- Non-dealing clauses – to prevent an ex-employee from any dealings with clients, customers, or suppliers, even if that person approaches the ex-employee first
- Non-poaching of staff clauses – should stop John approaching his former colleagues and enticing them to join his new company
Are restrictive covenants enforceable?
A badly drafted covenant is not likely to be enforceable. However, a properly drawn up clause, appropriate to the employee in question, may well be enforced by a court.
Usually, a clause in an agreement that restrains trade and prevents an individual earning a living is against public interest and may not be enforced. But the law recognises that it is also in the public interest to allow businesses to legitimately protect themselves. Restrictive covenants may therefore be enforced if they are shown to be reasonable when considering the interests of all the parties.
A reasonable restrictive covenant
To effectively use restrictive covenants to protect a business, they should have the following characteristics:
- They should be in a written agreement between you and your employee/contractor that is signed by both of you
- They should clearly protect a legitimate business interest such as a trade secret or confidential information, a client data base or supplier terms, or the retention of other key members of your workforce
- The restriction should be as narrow as possible in relation to the length of time of the restriction, the geographic area of restriction and the definition of the restricted activity. The exact extent of these will depend on the specific business interest that you are trying to protect and may vary from case to case
- They should be reviewed and altered if the employee is promoted
What if an ex-employee ignores a restrictive covenant?
If it becomes clear that an ex-employee has disregarded the terms of the contract, you need to act quickly to limit the damage to your legitimate business interests. An appropriately worded letter often produces the desired result. If this does not work, a court order called an injunction may be applied for urgently. An injunction may stop them from actions such as working for your competitor, using your data, or calling your clients, or it may compel them to do certain things, such as returning your documents and data.
However, an injunction may only be obtained at this early stage if there is real urgency and if financial compensation at a later point will not be adequate to cover the damage that your business will suffer if the action takes place. Delaying by even a few weeks could mean the injunction is not granted because a high degree of urgency is not demonstrated.
Making an injunction effective.
In our example, if you prove that the restrictive covenants in your agreement are enforceable, and the court grants you an injunction, John should take this seriously. If he fails to comply with the injunction, he will be in contempt of court and may be imprisoned for up to six months.
You may also join John’s new employer in the court proceedings, as well as any of your staff members who appear to be conspiring with John to join your competitor. This may effectively prevent further unlawful activity by all those people.
Damages to compensate for any loss may be claimed from your ex-employee. Strategically, if that ex-employee will not be able to pay this amount, stopping the damage in the first place by an injunction will be the best course of action. If John’s new employer knew about the restrictions and encouraged him to break them, it may be possible to bring a separate claim against that company – it may have deeper pockets.
Other ways to protect your business
Restrictive covenants are not the only way to protect your business from ex-employees. There is an implied duty of good faith in all employment relationships and a duty not to use or disclose confidential information gained in the course of employment. You may also demand the return of any information that John has retained and that belongs to you.
A court will also impose restrictions on John for misusing or disclosing confidential information, such as your trade secrets, even though he is no longer in your employment. Your business is also protected by other intellectual property laws relating to your trademark and patent. Copyright law prevents John from copying written works created in the course of his employment, and the design rights for work created during employment continue to belong to you.
However, if you do not currently have restrictive covenants in your employment contracts, take urgent advice and introduce them at an appropriate point. You may need to give affected employees salary increases or other compensation to show that you have been reasonable when introducing the restrictions. However, this may be money well spent to avoid damaging your business in the future.
Summary
There are other laws that protect from attacks by ex-employees, but well-drafted restrictive covenants offer you the best protection before too much damage is done. Taking legal advice early will enable you to navigate a safer path to achieving a fair result from the end of an employment relationship.