With all this recovery and the growing competition between businesses for skilled labour, it is inevitable that some of your staff are going to be tempted by, and may even move to, one of your competitors. If this happens and you haven’t protected your property – be it client lists, intellectual property or unique business processes – you may end up losing a lot more than just a staff member to the competition.
So what can you do to protest your business?
Whilst there are some implied obligations on employees in relation to their employers confidential information and trade secrets, restrictive covenants are becoming more and more common in employment contracts for senior employees, employees who have access to customers on a regular basis and employees with specialist knowledge of a business and its products or services. Typically, the use of such agreements is found in companies that could experience financial loss if employees became employed by competitors, taking with them client lists, trade secrets valuable knowledge or other co-workers.
So what are restrictive covenants and how enforceable are they?
There are three main types of restrictive covenants:
1. A non-compete clause would prevent you from working for a competitor for a defined period after the termination of your employment;
2. A non-solicitation clause that doesn’t prevent you from working for a competitor, but it does prevent you from soliciting customers of your former employer; and
3. A non-poaching covenant prevents you from poaching your former colleagues.
1. Non-Compete Clauses?
In general the courts have been reluctant to enforce these types of clauses as they are seen to be a restriction on a person’s ability to work and anti-competitive. Also, where a particular clause is seen as too broad or have unrealistic duration or geographically too wide they will be difficult to enforce as they will be seen as merely preventing employees from seeking employment elsewhere.
However, there are circumstances where certain restrictions will be allowed namely:-
A. Where an employer has a legitimate interest to protect- the restriction should not be a broad and general restriction on certain conduct; rather, an employer should specifically define the interest that may be damaged by the employee within the terms of the restriction itself;
B. Where the restriction is reasonable in terms of the activity that is being restricted- the restriction should only relate to the activity that the employee was engaged in whilst working for the employer;
C. Where the restriction is only for a reasonable time period-case law suggests that in general 6 months is reasonable;
D. Where the geographical extent of the restriction is reasonable- the extent of any geographical restriction will depend on the nature and location of the employers business for example a beauty salon that draws the bulk of its clients from the local area may require a relatively small geographic restriction e.g. 4 miles from the practice location.
2. Non-Solicitation Clauses?
In general non-solicitation clauses are more enforceable than non-compete clauses as they do not directly prevent an employee from seeking alternative employment. The same test of reasonableness in relation to the time period and geographic area also apply to these types of restrictions. When these clauses are being drafted the restriction should be as specific as possible as to what is allowed and what is restricted, e.g. is the ex-employee only restricted in approaching clients of the employer or is it intended to cover where customers contact the ex-employee directly.
3. Non-Poaching of Staff Clauses?
Again as with the other restrictive covenants the enforceability of these clauses will greatly depend on how key the individual being restricted is to the business. It should be remembered that these clauses are not intended to be enforceable against the person being enticed to leave the company but against the person ding the enticing. The employer should identify the key personnel in the organisation who may need other employees to assist them if they leave the business and go to a competitor or set up business on their own and consider putting a restriction in their contract to this effect.
4. What about enforcing the clause?
Employers are often reluctant to incur the cost or risk negative publicity in bringing an action against an ex-employee under a restrictive covenant. However, where such a restriction exists and a breach by the ex-employee is causing or could potentially cause the employer to incur significant loss of businesses serious consideration should be given to enforcement.
Furthermore such clauses do have an impact on employees who are considering leaving the company as they may be reluctant to test whether the company will bring an enforcement action, particularly where there is a clear requirement in their employment contract.
In conclusion where an employer feels that they have a legitimate interest to protect and that there are certain key employees who require some type of restriction then one or all of these clauses should be introduced into the contractual relationship.
The contents of this article are necessarily expressed in broad terms and limited to general information rather than detailed analyses or legal advice. Specialist professional advice should always be obtained to address legal and other issues arising in specific contexts.