The World of Work by Harry Sherrard

Restrictive Covenants

Restrictive covenants in employment contracts sounds like a pretty dull and turgid subject; until that is a key member of staff leaves the business and takes significant customers and/or members of staff with him.

As a potential crisis unfolds, the terms of restrictive covenants are transformed from technical and uninteresting wording buried deep in an employment contract, to business-critical status.

The old adage about bolting the stable door after the horse has gone all too often applies. Employers have promoted high performing members of staff to key positions, but have neglected to ensure that employment contracts reflect the increased seniority and influence that the senior employee exerts, over both customers and members of staff. Then, when the employee chooses to jump ship, either to set up their own business or to join a competitor, the employer is left with little or no protection.

It is an urban myth, and one that I hear often, that restrictive covenants “are not worth paper they’re written on”. Wrong. Properly drafted restrictive covenants are effective in preventing ex-employees from damaging the business. I have obtained High Court injunctions and awards of damages against miscreant ex-employees who chose to ignore the terms of their restrictive covenants, and tried to take customers away from their ex- employer.

Thought needs to go into the terms of the restrictive covenant, and there is no one-size-fits-all solution. In some cases, a geographical restriction will be relevant and appropriate, but in other industries geography is immaterial. The length of restrictions depends on a number of factors, in particular the seniority of the individual and cycles of the business concerned. For example, in insurance, where there are annual renewals, a 6 month restriction would be of little value to the employer, and a 12 month restriction would be more appropriate, to ensure that the annual renewals of customers fall within the restricted period.

Many times, I have seen restrictive covenants that only seek to prevent solicitation of customers. All very well if the employee is soliciting, but what happens if, as is often the case, evidence of solicitation is difficult or impossible to uncover? But it is nonetheless evident that the business is losing customers to the ex-employee? This situation highlights the importance of having non-dealing as well as non-solicitation restrictions; in other words, the ex-employee is not able to accept business from the customer concerned, even if that customer has made an approach, without any solicitation by the ex-employee.

I have also dealt with situations where a senior employee has taken a group of staff to a competitor, causing immense damage to the business. Covenants preventing ex-employees from employing their former colleagues are also enforceable, provided they are appropriately drafted and appropriate to the structure of the business. A covenant preventing recruitment of all members of staff would be unlikely to be enforceable, and therefore the employer needs to define which employees the restriction applies to, by grade, salary or other method.

When employers offer promotions and salary increases, they are entitled to require in return that employees sign appropriate restrictive covenants. I always recommend that when doing so, employers do not simply repeat previous terms of restrictive covenants, but assess the situation and ensure that covenants are up-to-date, fit for purpose and enforceable.



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