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Restrictive Covenants – Don’t be greedy and use your flower power

Posted on 26th July, 2017

Attempting to prohibit what an employee does or who they work for after they leave your employment always involves some risk of unlawful restraint of trade. The rights of the employer are balanced against the freedom of the employee and, as we are increasingly being told by the courts, it is the reality of the situation rather than the wording of the contract which will hold sway.

Unfortunately, many employers favour a one-size-fits-all approach and end up with post-termination restrictions which are ultimately unenforceable (a costly lesson if you have failed to get an interim injunction; worse if you are granted an injunction then lose at trial). To avoid wasting your time and money, please see the following key points for effective restraint provisions.

Remember the fundamentals

A restrictive covenant will be void unless you have a legitimate interest to protect and the protection provided is no more than is reasonably necessary. Legitimate interests will include confidential information which, unlike trade secrets, is not protected post-termination by the common law. Reasonableness will be assessed objectively, taking into account the interests of the parties and the public, as at the date the covenant was entered into.

The High Court reiterated these underlying principles in a recent case . There, an employer sought to rely on restrictive covenants entered into on commencement of employment which were not updated upon the employee’s several promotions. Owing to the employer’s confidence in the employee’s prospects from the outset – the judgment describes her as “a bit special” and she received a higher starting salary and bonus than would normally apply – a six-month non-compete clause was upheld. This decision was somewhat unique though and it is unlikely to assist employers seeking to enforce restrictive covenants which are included in employment contracts as standard.

Consider your options

There are a range of post-termination restrictions which an employer may consider making a term of employment. While a blanket approach appears attractive, the constraints of reasonable necessity generally mean that for less senior employees the more stringent restrictions, for example covenants prohibiting competition for a limited time, are less likely to be enforceable. In such circumstances a milder restraint, such as non-dealing and non-poaching covenants, may have been justifiable. However, where all are included, the non-dealing and non-poaching covenants run the risk of undermining the non-compete covenant as the court may well decide that the lesser forms of protection are adequate. Although it is possible in limited circumstances to sever restrictions which would otherwise prove an over-wide restraint, if preventing an employee from joining a rival employer for a defined period is the aim then, in the interest of certainty, a non-compete clause on its own will stand a better prospect of being upheld.

Draft carefully

What are the legitimate proprietary interests which you wish to protect? How has that knowledge been acquired by the employee concerned? Ideally, both should be covered in the relevant restrictive covenant clause in an attempt, so far as possible, to remove these from the issues which the court has to determine. However, careful wording is required as the restrictive covenants will be then interpreted in line with what you have set out rather than any interest raised at a later stage. Bear in mind that you cannot challenge an ex-employee’s knowledge of connections, goodwill, trade secrets and confidential information; enforceable restrictive covenants can only protect you against an ex-employee’s disclosure and/or use of such information.

Effective restrictive covenants limit their ambit of protection to matters with which the employee concerned has had a recent material involvement. In terms of customers, these will be those individuals and businesses whom or which the employee concerned had meaningful contact or a personal connection with, or held some influence over, during, say, the final 12-18 months of their employment. Consider listing particular individuals and businesses as examples of the legitimate interests you wish to protect.

In the case referred to above, the non-complete clause only extended to businesses with which the claimant was materially concerned in the 12-months prior to termination of her employment. As a result of this in-built limitation, the court dismissed the contention that, without any geographical limitation, the restraint had a global reach and was therefore unreasonably wide and unenforceable.

Build up

A cautious approach is encouraged as if you ask for too much then you risk your restrictive covenants being struck down, potentially leaving you with nothing. That is not to say that you should avoid including restrictive covenants in contracts from commencement of employment, which is fine provided that you consider, in each case:

  • is protection necessary (think about the legitimate interests which the employee will be exposed to and how their career could develop)?
  • what is the highest level of protection (both in terms of the type of restrictive covenant and its duration) which you can realistically justify?

Remember, not all employees will pose a risk to your business’ legitimate interests from the outset. However, where they do, only in the case of senior employees and special cases will the more draconian restraint provisions and lengthier restricted periods be reasonable.

Keep under review

If you start off with restrictive covenants which you could confidently enforce then later decide to promote the employee in question and take the view that their existing restrictions would no longer be adequate, there is nothing to stop you making entering into fresh restrictive covenants appropriate to the new role a condition of promotion. Irrespective of promotions, prudent employers review their employees’ post termination restrictions annually and in response to significant business changes such as a reorganisation or the business winning a major new client.
Where restrictive covenants are introduced or amended other than on promotion, allocating some consideration is advisable largely because it is difficult to rely on continued employment as sufficient where the contractual variation will not take effect until employment terminates.

Also, be aware that if post-termination restrictions existed but were not enforced when an ex-employee left in circumstances where they could have been, this could undermine any subsequent attempts to enforce similar covenants on the basis that the same interests are not legitimate ones, or there is tacit acceptance that the protection afforded is more than reasonably necessary.

Pick your battles

Evidence is vital – an interim injunction is unlikely to be granted in the absence of something to show that an ex-employee intends to, or has, breached their post-termination restrictions – the reason for seeking an injunction must not be frivolous or vexatious. Alternatively, if your application succeeds and it is subsequently determined that you were not entitled to the relief granted, you will be liable to compensate the ex-employee for their loss suffered in consequence of the injunction (most likely in accordance with the cross-undertaking you gave when the injunction was granted). Unsupported, pre-emptive strikes are no-no; failed applications will undermine your future prospects of gaining injunctions on similar grounds.

Make use of garden leave

A garden leave clause which enables you to keep an employee on the books during their notice period yet prevents them from attending work or contacting clients is a useful means of thwarting competition whilst simultaneously allowing confidential information to go stale. Establishing an implied right to put an employee on garden leave can be difficult so it always advisable to make this an express term of the contract. There is a risk that enforcing an unreasonably long period of garden leave could breach trust and confidence, however, this can be mitigated by providing for the duration of any post-termination restrictions to be reduced by the length of time the employee spends on garden leave. Although you will continue to pay the employee whilst they are on garden leave, the salary cost may well be less than the cost of obtaining an interim injunction whilst the process is far less risky and not overtly confrontational.

Consider a settlement agreement

Post-termination restrictions entered into under a settlement agreement are generally more enforceable than in a contract of employment as they will be more current, the employee will have received legal advice, and the parities will occupy a more equal bargaining position than at the beginning of the employment relationship or during it. There may need to be some additional consideration for fresh restrictive covenants, however, this is unnecessary where the agreement provides that the post-termination restrictions in the employment contract will continue to have effect following the termination date.

Take a commercial view

An interim injunction is an equitable remedy, as a result it will be at the court’s discretion whether to grant your application even if the post-termination restrictions you seek to rely on are unquestionably enforceable. Compensation is unlikely to be an adequate remedy where the particular damage your business has suffered is unknown, and/or further damage could be caused if the injunction is not granted, however, the court will still consider the balance of convenience before making a decision. Requiring an ex-employee to give undertakings that they have not and will not breach their post-termination restrictions, and insisting that their new employer acknowledge these, can be a sensible first step unless there is a real risk of further damage and you need the injunction without delay.

The cost of litigating restrictive covenant disputes can be prohibitively expensive. As a result, employers sometimes fail to take action to enforce post-termination restrictions for purely financial reasons. Fortunately, employment protection insurance is available to cover the cost of enforcing restrictive covenants, helping you to avoid a situation where the law is on your side yet you are unable to act.

For more information on restrictive covenants or other aspects of employment law, please contact Paul Clark on 0191 206 9626 or by e-mail pclark@jacksons-law.com.

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