Restrictive covenants: when the party’s over
Your top fee-earner, salesperson, tech guru, brilliant marketing manager, etc. hands in their notice. You’ll miss their expertise. They’ve been integral to your success. But, other than best wishes, what else may they take when they leave?
Your thoughts turn to sensitive and confidential information. Their great relationship with key clients. Their intimate knowledge of operating procedures, secret formulae, the five-year development plan they constructed.
And you breathe again because their employment contract contains restrictive covenants. Well, should you?
What are restrictive covenants?
These are clauses in an employment contract designed to protect your interests when someone leaves. But do they?
We caution clients to consider such clauses principally for deterrent value. They’re expensive and difficult to enforce. In the world of employment law, many phrases disparagingly describe them. My personal favourites are… as effective as an ashtray on a motorbike, and as much use as a chocolate teapot.
First and foremost, they’re a short-term measure. Covenants with a perceived timeframe exceeding 12 months are seldom enforceable. And if you’ve had the employee on ‘garden leave’, such period is offset.
Restraint of trade
But please also understand that the right to hold down gainful employment is enshrined in centuries old common law. The doctrine of ‘restraint of trade’ can be traced back to the early 18th century. So, the courts will intrinsically favour your ex-employee.
Two key aspects underpin ‘restraint of trade’. Firstly, there must be a legitimate business interest to protect. This might be key clients, business secrets etc. Secondly, provisions are ‘reasonable’, no more than necessary to protect those business interests. Protection is never indefinite. Periods lasting over 12 months are seldom enforceable. And they can’t be used to stifle competition. Deploy replacement provisions to counterbalance significant departures.
Some things to avoid
- Don’t issue them to every member of staff. This undermines their validity. Use sparingly with senior or specialist staff whose departure places your business at significant, identifiable, risk.
- Avoid over-long periods. Six to twelve months is usual and any ‘garden leave’ is included. Move immediately to protect relationships with key clients, etc.
- Avoid tortuous conditions. Banning someone from working ‘anywhere in the UK’ will not succeed. Trying to prevent them working for another organisation in the same sector but not a current client is incredibly difficult.
- Most restrictive covenants include a ‘non-solicitation’ clause to discourage ex-employees approaching current customers or clients. But check there’s a ‘non-dealing’ clause. Such clauses deter ex-employees from being receptive to unsolicited approaches from others.
- Think carefully about the relevance of geographical boundaries. Twenty years ago, most restrictive covenants specified ‘no go’ areas reflecting where the organisation operated. The internet has changed all that. Geography may still be relevant to services like hairdressers. But many organisations now operate nationally or internationally. Restraint of trade considerations may limit you here.
What else can you do?
- Although restrictive covenants are useful deterrents, there may be additional devices to consider. Moorepay employee handbooks or contracts usually contain confidentiality provisions. These remind employees that their duty of trust, confidence, and fidelity persist – even after they leave.
- Depending on the nature of their role, can personal data considerations be harnessed? Inappropriate harvesting or disclosure of personal data would potentially be a criminal offence.
- Sometimes ex-employees ‘misappropriate’ content from company databases, spreadsheets, accounts, etc. Even if they had legitimate access during employment, that doesn’t entitle them to export such data. Check whether your employee handbook has a clause about the Computers Misuse Act. This is criminal law and there are successful prosecutions every year. However, you may discover the police reluctant to get involved as they regard employment issues as ‘civil’.
- Do consider auditing leavers’ use of your systems pre-departure.
- Preferably supported by a restrictive covenant, but otherwise utilising the provisions above, a very fierce letter from your lawyer aimed at the ex-employee, and potentially their new employer, can work wonders.
Final considerations
Utilise restrictive covenants selectively. They’re not for every employee’s written terms. Equally, it’s never wise to give casual or temporary staff unfettered access to your trade secrets! Neither are they suitable for consultants or contractors. You need a different approach with ‘business to business’ relationships. Restrictive covenants are for key employees whose departure potentially exposes you to significant, identifiable, short-term, business risk.
Do ensure covenants are ‘user friendly’ and easily understood. Avoid legal gobbledygook. They should also provide employees with the opportunity to request reasonable variance which would not put your business at risk if agreed.
And when a key member of staff leaves, consider engaging a Moorepay consultant to prepare a settlement agreement. This is sensible even where there are restrictive covenants in place. The covenants may have been written years ago, and of course they’re of limited duration. A settlement agreement can refresh the provisions and incorporate additional factors relevant to the time and circumstances of departure.
