Andrea McCann: How far would you force a restrictive covenant?
EMPLOYEES are integral to the success of all businesses. But when individuals leave to join a competing organisation or set up their own business, they do so knowing confidential information and having built relationships with clients.
A restrictive covenant is a clause in a contract restricting the post-employment activities of the former employee and plays an important role in protecting a business from the potential threats posed by ex-employees. It is vital for companies to seek advice legal advice when putting restrictive covenants into contracts to ensure they can be enforced if necessary.
The starting point for any such post-termination restriction is that it is void on the ground that it is a restraint of trade and contrary to public policy.
However, if the ex-employer can convince a court that the covenant is designed to protect his legitimate business interests and that it extends no further than is reasonably necessary to protect those interests then it will be upheld and enforced.
There are different types of restrictions which can be used by employers and some of the most common include non-competition covenants which put restrictions on the former employee working in similar employment for a competitor; non-solicitation covenants which prevent poaching of clients, customers or suppliers of the former employer; non-poaching covenants which prevent an employee poaching former colleagues and confidentiality covenants which prevent the former employee from making use of or disclosing trade secrets or confidential information.
It’s important to remember that for a restrictive covenant to be enforced it must not be drafted too widely. It will be for the employer, in the event of a covenant being challenged, to show that the covenant is justified and sufficiently narrow.
Overall, a one-size fits-all policy on restrictive covenant clauses risks the clause becoming unenforceable.
Restrictive covenants should also be reviewed and updated when an employee’s role changes or in the event of promotion.
If an employer has reason to believe that an employee has breached the post-termination restriction, the most common remedy sought is an injunction. An application will generally be made for an injunction and request that the employee “deliver up” or destroy confidential information.
Where an employer claims a financial remedy or damages for breach of a restrictive covenant in an employment contract, the employer will need to show some loss resulting from the breach. This will normally be loss of profits on contracts or opportunities diverted by the employee.
Where the employee has been induced by the employer’s competitor into breaching restrictive covenants, the employer might choose to sue that employer.
Team moves between competing businesses have become a hot issue as businesses try and poach teams of employees from profitable parts of their competitor’s businesses.
Once an employer becomes aware that there may be a raid on its employees, it is important to act quickly to determine the best strategy to protect its position.
For employers looking to recruit teams, careful planning and execution will be necessary to avoid the pitfalls. If not properly handled a team recruitment drive will be found to be an unlawful poaching exercise.
Legal action in this area can involve a substantial amount of time and money so it is important for employers to understand their commercial objectives from the outset.
Overall, a clear strategy and game plan is essential. Seek legal advice immediately.
Andrea McCann (firstname.lastname@example.org) is a partner at McKees (www.mckees-law.com) specialising in employment law.