Post-termination restrictive covenants are a common feature of employment contracts, particularly for senior personnel who could cause serious harm to your commercial interests if they went to work for a competitor, began soliciting business from your customers or attempted to poach members of your staff.
In many cases employees honour their obligations without question, but in some instances restrictions are ignored and disputes arise. In this situation prompt legal advice is essential, however as Elizabeth Bartle, employment lawyer with Ingram Winter Green in London explains, it is equally, if not more important to ensure that you have adequate protection in place before the problem arises:
‘You may suspect or know that a senior member of staff is about to start working for a competitor, or that a member of your management team has left taking commercially sensitive information with them, the extent to which you’re able to protect your interests will depend on the strength of the contracts you have in place. I frequently find that in this situation employers are hindered in their ability to take action because they are relying on outdated or poorly drafted contracts.’
Restrictive covenants can offer a degree of protection, but only if they satisfy the strict legal criteria required to make them enforceable. Employees are becoming increasingly aware that restrictions which seek to exclude them from an industry or profession, even for a short time, may be susceptible to challenge and are therefore seizing on this to try to avoid abiding by restrictions previously agreed under their contract of employment.
“The extent to which you’re able to protect your interests will depend on the strength of the contracts you have in place.”
It will be too late to change the covenants once your employee is planning to leave or has left your employment. Is therefore essential that an employer regularly reviews their employment contracts to make sure that that they are up to date and appropriate for their employees. An ideal time for a contract review is when you are about to promote an individual and/or increase their remuneration
Criteria for enforceability
To be enforceable, a restrictive covenant must be:
- necessary to protect a legitimate business interest;
- no wider than necessary to achieve that objective; and
- no longer in duration than is needed – which in most cases means a maximum of 12 months and in many instances significantly less than this.
It is vital to note that whether the qualifying criteria is met will be judged at the time the restriction was agreed, as opposed to the time at which the dispute arises.
A restrictive covenant must also have been formally incorporated into the employee’s contract of employment and not subsequently rendered void, for example as a result of a breach of contract occasioned by the employee’s wrongful dismissal.
Options where a dispute arises
Finding out where you stand and coming up with a plan of action to protect your business interests is something you should do as soon as you become aware that a potential problem exists.
If an employee raises questions about the enforceability of a restriction, as an employer you have three options:
- accept that the restriction is not enforceable and take no further action;
- maintain that the restriction is enforceable and insist on full compliance; or
- acknowledge that there may be a question mark over enforceability and so attempt to reach a compromise to ensure a certain and satisfactory outcome, usually via agreed adjustments to the restriction to make it more palatable.
Advice at this stage is key in order to help you decide which option to take, to advise whether enforcement action is appropriate and whether such action ought to be directed solely at your former employee or also at their new employer. This might be the case if the new employer capitalises on any wrongdoing, for example by using your pricing strategies to secure contracts that would have otherwise been awarded to you.
Pausing for thought
In nearly every case where enforcement action is contemplated, you will be advised to try to find a mutually agreeable solution before escalating matters to court. This might be possible through direct negotiation or by the use of an independent mediator.
An amicable solution may be possible where the dispute is based on the scope or duration of the restrictions and they can be scaled back without causing unacceptable harm to your business.
When court action may be necessary
If attempts to reach an amicable solution have failed or the severity of the damage being caused to your business is so high that an injunction is needed to bring an immediate halt to your former employee’s activities or those of a new employer, court proceedings may be advised.
When bringing court proceedings, an employer will be asking the court to determine the enforceability of the covenants and, depending on the outcome, asking for an order directing your former employee to comply with the restriction and to pay compensation for any losses you have incurred.
To support your claim evidence will be required to prove:
- that the covenant was necessary;
- it was reasonable in scope and duration;
- your former employee agreed to be bound by it;
- the terms of the restriction have been breached;
- you have suffered loss as a result; and
- you will continue to suffer going forward if non-compliance continues.
Where an injunction is being considered, there will need to be sufficient evidence to persuade the court that such an order is necessary, primarily by showing that:
- the harm you are suffering cannot be compensated adequately by an award of money alone; and
- the damage that will be caused to you if an injunction is not granted will be worse than the damage caused to your former employee if an injunction is granted when it ought not to have been.
How we can help
Deciding whether to apply for an injunction requires careful consideration, particularly as it could be you who ends up having to pay compensation to your former employee and/or their new employer if the wrong call is made.
If you need help to review your contracts, if you foresee a dispute or a dispute has arisen please contact Elizabeth Bartle on 020 7845 7443 or email elizabethbartle@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.