Companies can protect their know-how and client lists from former employees
with well-drafted contracts.
In an increasingly specialised industry, the minds of
manufacturers are often more valuable than the machines,
and manufacturers should be looking for opportunities to
protect the know-how that drives their innovation. Restrictive
covenants in employment contracts are one means of doing
so.
Restrictive covenant clauses can take several different
forms in a contract of employment, each with the effect of
safeguarding, insofar as is possible, a company’s knowledge
and customer base:
- Non-Compete clauses prevent a former employee from
competing with their previous employer.
- Non-Poaching clauses restrain a former employee from
hiring former colleagues.
- Non-Solicitation clauses stop former employees from
taking steps to encourage clients away from their former
employer.
- Non-Dealing clauses prevent former employees from
having any dealings with their previous employers’ clients.
We hear an almost uniform refrain from clients when the
issue of restrictive covenants arises (usually at a stage when- protect a company’s interests through litigation) – “there
is no point in wasting money trying to include them in our
employee’s contracts because they’re unenforceable”.
That assumption is unfounded. Our recent experience is
of willingness within the judiciary to enforce well-drafted
and reasonable restrictive covenant clauses against former
employees, contrary to the widely-held belief that they aren’t
even worth the paper they’re written on and leaving restrictive
covenants out of a contract of employment exposes the
company to the risk of losing market position and custom to its
steps are being taken to retrospectively – and often fruitlessly
competitors. The emphasis has to be on good drafting; clauses
can be too wide in scope or too punitive and a court is likely
to be disinclined to impose draconian restrictions on a former
employee.
A second, less-commonly held view among clients is that
clause should be drafted as strongly and as widely as possible
to act as a deterrent to former employees. Such an approach
errs too far on the side of caution at the risk of enforceability.
Instead a middle ground needs to be adopted with a
considered and appropriate protection being put in place to
protect the company’s interests, expertise and consumers.
The company should consider what it is exactly that it is
trying to protect and stick to protecting only that. Be it access
to customer records, access to technical expertise or former
colleagues, it is worthwhile investing time to understand
what an employee’s role will expose him or her to and how
and when exploitation of that know-how might prejudice the
company’s interests.
Having considered the potential risks, the employment
contract should be drafted to include clauses, which include
restrictive covenants necessary to protect legitimate business
interests, and, in doing so, are reasonable both in scope
and duration. This means there can be no one-size-fits-all
restrictive covenant clause; our advice would always be to
seek legal advice before entering into an employee contract if
you think restrictive covenants may be relevant. Not doing so
may turn out to be a false economy given the risk posed by a
former employee taking with them details of your catalogue,
customers and colleagues.
A High Court decision in the case of Decorus Limited v Penfold
[2016] demonstrated the value and importance of well-drafted
restrictive covenants when finding in favour of a company
whose former employee had left along with copies of customer
contact sheets and purchase logs. In awarding damages to
the claimant company, the judge noted that whilst the original
employment contract had contained very widely-drafted
restrictive covenants which would have been incapable of
enforcement, that contract had since been usurped as part of
the internal pay review process by a new contract with more
narrowly-focused clauses capable of enforcement.
Absent the re-drafting, the former employee would not
have been prevented from making use of confidential and
commercially sensitive information, allowing him to pry
customers away from his former employee.
The judgment provided some useful indicators as to what a
court will consider when deciding upon the enforceability of
restrictive covenant clauses:
- The non-solicitation clause in the contract was deemed
enforceable since the protection of confidential customer
information was a legitimate business interest and the
restriction was limited to six months in duration and only
related to existing customers.
- Similarly, the non-dealing clause was also deemed
enforceable because the company could show it had
developed a unique business strategy in the provision of
its services.
- In contrast, the non-compete clause was not enforceable
since it sought to prevent the employee working in a
variety of roles (not just sales) in any of the industries in
which he had operated during his employment. This clause
was severed from the contract as it was an illegal restraint
of trade.
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