Employment laws generate a lot of comment. Hardly a day goes by without the media reporting scare stories about the employment rights of UK employees, which are depicted as being anti-competitive, unduly restrictive and in many cases overly generous.
We are exposing some of the most common employment law myths and explaining the reality behind them. We are not pretending that employment law is easy – it isn’t, but generally it should not be difficult to get the basics right.
This month we look at restrictive covenants.
Myth:
There is no guaranteed way to prevent our staff from competing against us after they leave
Reality:
You can protect your business from unfair competition provided you have well-drafted restrictive covenants in place limiting what staff can do during and after they leave your employment.
The starting point when putting restrictive covenants in place is to consider:
- What legitimate interest are you looking to protect? Typically this will be your clients, suppliers and key staff.
- What damage could the employee do if they were to leave? A sales executive with client contacts and knowledge of your products and pricing is more likely to be able to damage the business than someone in a back office role with no client contacts.
Once you have answered these questions, you should then tailor the restrictive covenants to the individual and the risks you face if they leave and set up in competition or join a competitor. Covenants will only be enforced if they are reasonable – i.e. go no further than is necessary to protect your legitimate business interests. Courts will not rewrite restrictions and will not enforce any that are not reasonable.
When deciding whether covenants are enforceable, the courts will examine them at the time your employee entered into them, NOT at the time you wish to rely on them which could be several years later. So if you include restrictions in a contract of employment for a junior member of staff which are unreasonable, they will be unenforceable. They will remain unenforceable even if the individual is promoted to a senior role in respect of which the covenants would otherwise have been enforceable.
With this in mind, it is sensible to periodically review the restrictions contained in the contracts of key members of staff and amend these when they are promoted, change jobs or there is a change in the company (for example by reason of a TUPE transfer) to make sure that they remain focussed and therefore enforceable.
It is better to draft more restricted covenants that are enforceable than longer ones that are likely to be unenforceable. So for example, covenants restricting individuals from competing at all for a year are less likely to be enforceable than ones preventing competition for 6 months. You should also look to limit the categories of clients or customers the employee cannot contact to those he or she actually dealt with or had contact with over the previous 6-12 months and any geographical restrictions reflect the areas where you actually do business. Canny employees will seek advice and will be advised they can ignore clauses that are drafted too widely! It is therefore better to be safe than sorry.
A word of caution. Even if your restrictive covenants are a masterclass in drafting, you will not be able to rely on them if you breach the terms of your employee’s contract of employment. This might occur if you dismiss the employee without notice (in circumstances where you are not entitled to do so) or you pay the employee in lieu of notice without the contractual right to do so.
For key employees who could do a lot of harm to your business if they left, it is also sensible to include a ‘garden leave’ clause in their contract of employment. This will allow you to ask the employee to remain at home for part or all of their notice period. Garden leave is the most effective way of preventing employees competing, and securing relationships with clients as the individual remains employed by you during garden leave and is therefore bound by all the obligations of an employee. The flip side, however, is that you have to pay them to sit at home during garden leave, so there is a cost implication.
Need help?
Our IM Protect service provides you with all the tools you need to protect your business and confidential information at fixed rates. It also gives you effective processes and procedures to avoid the pitfalls associated with recruiting individuals/teams and the damage that can occur to your business.
For more information, please contact Fergal Dowling on +44 (0)121 214 5476 or fergal.dowling@irwinmitchell.com.
Published: 3 July 2017
Employment Law Update - July 2017
Sign up to receive our monthly employment law update
For general enquiries
0808 291 3524
Or we can call you back at a time of your choice
Phone lines are open 24/7, 365 days a year
