BEWARE THE PITFALLS OF RESTRICTIVE COVENANTS
Contracts of Employment
All too often Employers take a 'cut and paste' approach to drafting contracts, including clauses governing post termination obligations on employees. These obligations are known as restrictive covenants and are particularly relevant for senior or 'key' personnel. Equally at the start of a job, employees can be forgiven for focusing on the main and obvious contract terms such as salary and other benefits, when they initially review their contract. Both approaches can lead to problems later on when the employment ends, and it is vital for parties to try and avoid them. Additionally, new employers who are competitors need to be aware that they too can be sued, for inducing a breach of contract, if they take on someone who is in breach of their covenants.
An Employer understandably wants to protect his business relationships, database, contacts, and customers. So what is the key to drafting a contract to give the Employer maximum protection when an employee leaves to ensure they do not set up a competing business and take staff and clients with them?
The Principles
It has long been established that a balance needs to be struck between someone's right to earn a living and work in the industry/profession they are skilled in, and an employer's right to protect his 'legitimate business interests'. If the Employer goes too far then the covenants are unenforceable, so what can an Employer 'get away with'?
The answer on the face of it is simple; the covenant must be reasonable in the circumstances taking into account both the interests of the parties, and public policy. Part of the problem is that each case will vary depending on the facts, hence why boilerplate clauses and a 'one contract for all' approach, is of no use at all. A classic approach by the Employer is to throw the kitchen sink in and have longwinded clauses on everything (typically including restrictions on):-
•· Working for competitors;
•· Approaching or seeking business from your clients;
•· Your employee dealing with your clients even if they approach him/her;
•· Your employee recruiting other staff from your business;
•· The area your employee can work in; all for a set time limit following the termination most commonly ranging from 3 to 12 months.
The Test of reasonableness
Deciding on the correct time limit is not set in stone, and it can be very hard to anticipate what would be deemed reasonable. Employers tend to put the maximum in, but need to understand that if they do that, and the court thinks it is unreasonable, the whole clause is void. For example, if you put 12 months and should have restricted it to 6 months only, or if the clause is too wide in any other way, the courts will say the employee is not restricted at all. They will not re-write the contract for you or imply any reasonable terms, which may seem harsh. It is better if in doubt to work on the premise that the narrower the restriction the more likely it is to be enforceable. Other factors taken into account include the breadth of the geographical area, and the type of interest being protected (e.g. genuine trade secrets may be more widely protected).
A common question is whether in the absence of any express restrictions on the employee, any covenants are implied after the employee leaves. The answer is there is still a duty of confidentiality in that an employee is forbidden from disclosing or misusing truly confidential information which amounts to a trade secret even after the employment has ended.
Conclusion
The practical result when an employee leaves on bad terms is often an initial reaction/overreaction on the part of the Employer, and a strong letter threatening injunctive relief being sent out to the employee. In reality though, court action is invariably a very high risk strategy and applying for an injunction is both risky and costly for both parties. There is also the option of suing the employee for damages if an injunction is not obtained. There is a general view that they are more trouble to enforce than they are worth. A common way to avoid any doubt is simply to include a clause on 'garden leave'. This enables the Employer reasonably to request the employee to stay away and have no contact with staff and clients, while still being paid, for a certain period, to limit any damage when they eventually leave. This clause is also subject to the reasonableness test.
The best way to avoid any problems is to have bespoke contracts drafted for all key staff. Employers should make sure their contracts are regularly updated and reviewed to ensure maximum protection.
Contact
For more information on drafting and negotiating employment contracts, and other employment matters, please call our legal team on 02031784464 or e-mail us.
