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RESTRICTIVE COVENANTS
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:
1. 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;
2. 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.;
3. non-poaching of employees – which seek to prevent an ex-employee
from recruiting former colleagues for a set period following termination;
4. 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.
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