What you need to know about restrictive covenants in employment contracts

17 Jul 2017

We spend a lot of time advising clients on restrictive covenants, whether that is drafting them in employment contracts, or determining when an employee is potentially in breach. Restrictive covenants are an essential safeguard for many businesses, but they must be drafted properly if they are to achieve the desired outcomes. Read on to have some of the most frequently asked questions on restrictive covenants answered.

Q.1    What types of restrictive covenants are there?

  • Non-compete: preventing the employee from working for a competitor. This is the most draconian restriction and the hardest to enforce. It can be drafted to apply only to a certain geographical area, which can improve the chances of it being enforceable
  • Non-poaching of customers
  • Non-dealing with customers: i.e. the employee is to have no dealings with your customers at all for the restricted period
  • Non-poaching of staff
  • Non-interference with suppliers

Q.2    How do we decide what restrictions to go for?

The key is to think carefully about what you are trying to achieve. Most businesses want to use restrictions to stop employees poaching their staff and their customers. We often challenge clients to say do you really need a non-compete restriction as well? For senior employees, who have access to a high amount of confidential information which in the hands of a competitor could be commercially very damaging, a non-compete may be appropriate. But for most of your workforce, the non-poaching and non-dealing restrictions may be more than enough.

Q.3    How long should the restrictions be for?

The $64,000 question! The answer depends very much on your business and the industry or market you operate in. Ask yourself: how long do we honestly think it will take to recruit and train a replacement? How long will it take to get in front of our customers and cement our relationships with them once the employee has gone? Inevitably, the shorter they are, the more likely they are to be enforceable. Three or six month restrictions should be enforceable in most cases, but 12 month restrictions can also be in the right circumstances.

Take the insurance sector as an example – most insurance policies are renewable annually, so it is usually in the few weeks pre-renewal that there are discussions with the customer about renewal terms. Some of the renewals could fall 10 or 11 months after the employee has left. In that sector, 12 month restrictions have been held by the courts to be enforceable because it may take an insurance business 12 months to get back in front of its customer to discuss and secure their renewals.

Also, remember to consider the connection between garden leave and periods of restriction. It is often advisable to ensure that any time spent by the employee on garden leave is deemed to be part of the period of restriction.

Q.3    Does the employee have to sign them?

Yes. That is why it is so important to chase employees who do not return their signed employment contract.

Q.4    If one restriction is held to be unenforceable, does that make the rest unenforceable?

Not necessarily. Make sure each restriction is separate, and even if one is deemed to be enforceable, the rest should remain in place.

Q.5    If an employee is promoted, should we get them to sign a new contract with new restrictions?

Ideally, yes. Courts assess whether a restriction is reasonable and therefore enforceable at the time it was entered into, not at the time when you try to enforce it.

As employees get promoted, the harm they can potentially do if they leave may well also increase. They will have access to more of your confidential information, they may well be managing a team, they will be potentially the key contact for your customers. It is therefore crucial that you consider updating their restrictions as they become more senior.

It is always advisable to try and link the signing of a new contract with, for example, a pay rise or perhaps an enhanced benefits package for the employee.    

Q.6    What do we do where we inherit new staff under TUPE?

Firstly, check whether they have restrictions in their contracts. Bear in mind that the restrictions may have worked for their old business, but may not work for you. If they do not, then if you do want them to sign up to your restrictions, this may be open to challenge under TUPE. Get advice at an early stage – it is not impossible, but it requires careful planning.

Q.7    What do we do if we think an ex-employee is breaching their restrictions?

By far the most important thing here is the quality of the evidence you have. If you think the ex-employee is “tapping up” your staff or your customers, then how do you know this? Can you get statements from your staff or your customers to confirm that they have been contacted by the ex-employee? Has any business already been lost? Can you prove that business was lost as a direct result of the ex-employee’s actions? What’s the value of business already lost, or potentially lost?

Evidence from computers is often crucial in these cases. Lock down their old desktop and laptop. Then consider getting forensic IT experts to “image” the computers – you may well be surprised at how much crucial evidence can be left on computers despite employees’ attempts to delete folders.  

Q.8    If we have the evidence, what do we do next?

Then it is decision time. Options are:

  • Go to court and seek an injunction – this is the most robust option, but one which is expensive and also carries the greatest risk. Why? If you go “ex parte” (i.e. without notice to the employee) then you need to be confident that the restrictions are enforceable, and have strong evidence of the ex-employee being in breach, or of them making plans to breach
  • Send the ex-employee a “cease and desist” letter. This is the most common option. It will involve restating the restrictions that are in place, explaining what evidence you have of a breach, and then requiring any one of a number of things which could include:
    • Giving back to you any confidential information or documents they have in their possession
    • Requiring a full explanation of what conduct of theirs has already put them in breach
    • Seeking signed undertakings that they will not commit any further breaches
  • Bring a claim for damages. Inevitably this will come down to you being able to prove what financial losses you have suffered as a result of the ex-employee’s breaches

Enforcing restrictive covenants – whilst complex and potentially expensive – is an important tool to protect your business from errant ex-employees. If you ensure your restrictions are properly drafted to suit your business, then the chances of being able to enforce them is far higher.

Our Employment and Dispute Resolution teams are experts in advising businesses on restrictive covenants. If you have other questions , please contact me via the details below.

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