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Restrictive covenants

Protecting your business post-employee exit, are you missing

the most powerful weapon in an armoury“.

What can I do?

Your employment contracts

Employment contracts are most often untested and unmaintained – with the unassuming employer haphazardly believing their contract is a safe pair of hands. However, when an employer is seeking to protect its business from a former employee it may be surprised that their contract of employment lacks teeth.

Setting the scene

Your employee has good experience, knowledge of, and access to, information relating to your business’ strategy, intellectual property, trade secrets, clients and the market.

Your employee ends his employment and joins your rival competitor or sets up New Co. and seeks to take your clients, contacts and contracts for their new employer or business, New Co. Damage is done.

It will not be a surprise that employees of the above calibre will be an attractive prospect to your competitor or may go it alone with New Co.

What can you do, or what could have been done to protect your business?

The TEETH

Restrictive covenants are contractual terms which prevent an employee from damaging your business.

They are usually and ideally contained in a signed employment contract, or other document that is specifically referenced to, such as a Staff Handbook or side letter. It is vital that the restrictions are incorporated into the contract of employment by complete and specific reference to all relevant documents.

The post termination restrictions should only aim to protect a legitimate interest of the business to the extent that they are reasonably necessary for that purpose. The covenants must be worded correctly or risk them being partly or wholly ineffective.

The usual types clauses are:

  • Non-solicitation

THE AIM: To prevent a former employee contacting your customers or clients with a view to obtaining their business.

  • Non-dealing

THE AIM: Bolted on to non-solicitation clauses and prevents former employees from having any dealings in the sale or supply of relevant goods or services to your business. The purpose of the restriction is to allow you to build your business back to the position prior to the employee’s exit. Enforceability of a non-dealing restriction will depend on the interest you are trying to protect.

  • Non-poaching

THE AIM: Prevention of the former employee soliciting other employees to protect the stability of the workforce

  • Non-competition

THE AIM: To prevent your ex-employee joining a rival business or setting up a new company for a period after termination, has been viewed by the Courts as: “the most powerful weapon in an employer’s armoury“.

A “non-compete” clause is however generally harder to enforce, as the Courts may find the other restrictions listed above do a sufficient job of protecting your business’ interest. They should not restrain trade.

  • Confidentiality

THE AIM: To protect confidential information, intellectual property, trade secrets and the like. Covenants of this nature should be included in the contract of employment and other company related documents for example shareholder agreements, contracts for services and consultancy agreements that any employee could be involved with or privy to.

Remedies

Should a situation of the above nature arise, your claim begins with the contract.

The merits of your claim will hinge on the effectiveness of the contractual wording together with the evidence available in support of the damage caused or likely to be caused to your business.

  • Injunctive relief

Commonly the aggrieved party will seek an injunction from the Court to enforce the terms of the covenants and to prevent the former employee (and possibly their new employer) from causing any, or any further damage. Time is of the essence and a party seeking an injunction must ack quickly, any delay will only cause the Court to question the need for injunctive relief.

  • Damages (a financial remedy)

A claim brought against the former employee and/or employer for damages due to financial loss suffered and caused by the former employee breaching his restrictions or indeed as against their new employer for inducing the former employee to breach the restrictions. Evidence of actual financial loss is key.

  • Undertakings

An Order from the Court or an agreement by the offending party to promise to do or not do something to prevent any further damage. If not honoured this can be actioned in its own right.

  • Delivery up

The offending party is required to deliver up confidential information or other property owned by your business. As above, you may reach an agreement with the other party or seek an Order from the Court.

Considerations

Employees can only be bound by those terms that are included in their contract – providing they are legally enforceable.

Restrictions should cover exactly what business interests you are seeking to protect and should not be too widely drafted. Bespoke drafting of the contracts tailored to your business is paramount. Importantly it follows that you should be able to justify the basis and scope of the restrictions if ever tested.

If your employee has moved around the business into a new or varied role, you should consider whether the restrictions are sufficient or appropriate. Variations to an existing contract of employment must be supported by ‘consideration’ given by the employer to the employee, to be valid. In other words, in exchange for varied or newly introduced restrictions in the contract the employer must give the employee something in return such as a pay increase or promotion, making it clear such ‘consideration’ was given for that purpose.

When considering what restrictive covenants are best for your business, careful consideration should be given to the position of your employee and the activity you are trying to prevent linked to clients and competitors. Factors for consideration will also include: the market in which you operate; your services; geographical location; and the requisite length of time of any restriction.

A covenant seeking to protect confidential information will be determined by any evidence you have to show that the information is confidential, with consideration of the above.

Final thoughts

Proactivity rather than reactivity. Be pre-emptive.

Any disputes of this nature are time consuming and costly, detracting resource from your business. If you are unsure about where your business stands from a pre-emptive position, it may be prudent to review your business’ documentation.

If you are involved with a dispute or are likely to become part of one, the collation and preservation of evidence is key. We would of course recommend seeking legal advice as soon as possible.

If you need advice on restrictive covenants or how to manage your business post-employee exit please contact Jonathan Partridge at jonathan.partridge@dtmlegal.com or call him on 01244 354811.

 

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