Businesses rely on the quality of their competitive knowledge, the effectiveness of their delivery, and the nature of their supplier and client relationships. A new employee will begin to be entrusted with understanding about all these areas of the business when he or she joins the company.
Yet with that trust comes risk. Even the best recruitment process can’t ensure that a new recruit won’t one day prove impatient or disgruntled enough to leave for a competitor. When that happens, you may find your business facing competition from a company that now knows you from the inside out.
In order to help reduce this risk, businesses include restrictive covenant clauses in their contracts of employment. These ensure that the new employee cannot simply quit to join a competitor, putting all his or her training and inside information at the service of a rival.
“Restrictive covenants are particularly important if an employer wishes to protect their business and the employee has extensive knowledge of, for example, clients, suppliers or business strategy,” says Tony Müdd, Divisional Director at St. James’s Place.
Nevertheless, companies often lack the time or inclination to work out all the contractual details involved, and opt instead for the simpler option of copying covenants used by other businesses, assuming that they have successfully mitigated the major risks. Unfortunately, such off-the-peg solutions often fail to deliver.
“Taking a shortcut by copying restrictive covenants used elsewhere often means the restrictive covenant will be unenforceable, for a variety of reasons,” says Müdd.
Choose your covenant
What goes into a restrictive covenant will depend on the needs of the employer but, broadly speaking, there are five main types:
- Confidentiality – prevents a former employee from disclosing trade secrets
- Non-competitive – places restrictions on a former employee working in similar employment for a competitor, using practices/strategy gained in their old job
- Non-solicitation – prevents the soliciting of suppliers and customers from the former company
- Non-dealing – prevents business association with former customers or suppliers
- Non-poaching – prevents the taking of former work colleagues to a competitor.
Once you know what kind of covenant you need, you need to ensure it will be enforceable. It is therefore important to ensure it is carefully drafted, correctly balancing your right to protect your business with your employee’s right to use his or her skills in the workplace. There are three fundamental elements to consider:
- The duration of the covenant has to be no longer than is necessary to protect the employer’s business interests. This is usually 6–12 months.
- The geographical area cannot be too wide – and such a clause may not even be appropriate if the business can operate from any or several locations.
- Whilst what counts as reasonable will differ, the covenant must not go further than is necessary to protect the business.
When the time comes…
It is not easy to enforce restrictive covenants. In great part this is because they vary so much, which means that a good deal of the detail is left to the courts, who will determine the outcome based on individual circumstances. There are three main approaches a company might take, if it needs to enforce a covenant.
- Injunction – prevents an employee from breaching the covenant (but any delay by the employer provides just cause for the court to refuse an injunction).
- Damages – an employer could seek damages incurred from the covenant breach, but it could be hard to prove the link between that breach and the business loss.
- Account of profits – if the ex-employee/new business profited, the old employer may be able to recover the sum (if the link to a broken clause is proved).
Even if you draft a tight covenant document for a new employee, it can still go out of date. If any employee fails to sign a new contract on promotion, for example, then the old covenant may become unenforceable.
Moreover, businesses themselves often develop over time, stepping into new geographical regions or business areas. Either of these changes has the potential to invalidate existing covenants.
Restrictive covenants, then, are specific to the circumstances of the employee and business to whom they apply. To ensure they continue to provide the protection you expect, an occasional review is well worth the trouble.
Your St. James’s Place Partner will be able to advise you on which of our panel providers you would need to be referred to, given your particular circumstances, for further advice in this area.