How do you stop key staff moving to a competitor and/ or taking others (customers, staff, etc) with them: A basic guide to restrictive covenants in employment contracts
Having appropriate restrictive covenants in place can be key for protecting your business and its assets. Unfortunately, many companies don’t use these tools to their full potential and find themselves exposed as a result.
What are restrictive covenants?
Restrictive covenants are terms in employment contracts which restrict certain activities by employees for a limited amount of time after their employment ends. Restrictive covenants can also be found in other types of contracts, but we will focus on employment contracts here.
Typically, the activities that are restricted include:
- working for a competitor,
- trying to win business from customers,
- doing business with suppliers, and
- recruiting colleagues.
How can businesses use them?
If drafted correctly, restrictive covenants help a business protect itself in various ways when an employee leaves employment.
For example, in respect of a key salesperson they (along with a long notice period, garden leave, etc) can provide ‘breathing space’ so you can find a replacement and cement relationships with important customers. They can also discourage the salesperson from sharing confidential information about your customers with their new employer. And they can prevent them from taking their team with them, which could leave a company without the necessary expertise to operate.
What are the legal problems associated with them?
Even if an ex-employee has restrictive covenants in their employment contract, if they breach them, for example, by going to work for a competitor, an employer’s only option is to go to court. However, restrictive covenants are notoriously difficult and expensive to enforce. Which is why it’s more often seen in the world of banking/ financial services.
The courts are generally reluctant to side with employers seeking to enforce restrictive covenants and will look to see if the covenant is reasonable; if not, it will not be enforced – the court will not re-write the covenant to make it enforceable.
Common reasons that a court will not enforce a restrictive covenant include:
- The employer does not have a ‘legitimate business interest’ to protect i.e. there is no actual risk to its confidential information, client relationships or workforce stability.
- The clause goes further than the employer needs to protect itself: it is too wide in relation to the restricted type of business, clients or employees or, it applies for too long.
This is a complex area, therefore taking advice early is recommended. If you want to discuss the above get in touch.