RSS feedsTake a look at any director or senior employee’s contract of employment and you are likely to find a lengthy clause restricting their competitive activities after their employment has ended.
However, it remains a common perception that such restrictions are not worth the paper they are written on, not least because the law is reluctant to limit a person’s freedom to sell their labour. But this is an unduly negative view.
The courts will enforce restrictions on competitive activities where there is a legitimate business interest to protect and the restraints extend no further than is necessary to protect that interest.
An employer may look to protect confidential information, business connections with clients, suppliers and intermediaries and the stability of the workforce through the use of a variety of restrictions on competitive activities.
The most onerous restriction is a non-compete covenant. This is intended to prevent the former employee from competing with the business they have left for a fixed period after leaving and often within a specific geographical area. Because such a restriction could prevent a person from working, they have been very difficult to enforce. Recently however, the courts have been willing to enforce non-compete covenants, particularly in respect of very senior employees. In Thomas v Farr, the court upheld a 12-month, UK-wide non-compete clause against a senior director in the insurance industry.
Protecting your clients
Employers who wish to protect their client connections must rely on non-solicitation or non-dealing covenants. The courts will not enforce such covenants unless they are limited to those clients with whom the employee had personal dealings within the last few months of their employment. Again, it is appropriate to restrict the application of the covenants in time, linking that period to the business cycle.
Non-poaching covenants are intended to prevent the ex-employee from taking some of their colleagues with them to a competitor. When assessing such covenants, the courts look to balance the right of employees to move jobs against the employer’s interest in maintaining a stable workforce. These covenants are generally only enforced by the courts where there is a clear link between the ex-employee and the other employees, the covenants are limited in time and are restricted to employees who can influence where business goes or who are in possession of confidential information.
Confidentiality covenants are aimed at preventing the ex-employee from disclosing or making use of confidential information after their employment has ended. A well-drafted clause will have a general statement of the duty of confidentiality and then specify what the employer treats as confidential information (by way of a non-exhaustive list). These covenants usually continue for as long as the information remains confidential.
A watertight clause?
While it is common to find some or all of these restrictions in employees’ contracts of employment, it is far less usual to find clauses drafted in a way that will stand up in court. The problem with most covenants is that they are treated as standard for all employees and drafted without any consideration of the role of the individual. No account is taken of what contact the employee will actually have with clients and what influence over them they might have, with no assessment made of the nature and level of confidential information they will become aware of, how many employees they will be closely connected to and who might affect where future business is placed. Attention to detail is essential when drafting such covenants. Too often clauses are drafted with a ‘one size fits all’ approach that does not work. Typically the wording of such clauses will be far too wide and the period the restrictions are to last will be much longer than is reasonable.
Given the potential damage an ex-employee could cause to a business, it is clearly good practice to include restrictions on competitive activities in contracts of employment for, without them, a former employee could act competitively with impunity. However, if such clauses are to be effective the employer must give careful thought to how they are drafted so that they are relevant to the particular employee’s situation. Restrictions are interpreted by reference to what the contracting parties had in mind at the time the agreement was entered into. So when an employee is promoted it is important to consider whether new or revised restrictions on what they may do when they leave should form part of their new terms of employment.
A well-drafted restriction, specific about what it is intending to protect and which lasts for no longer than is reasonable will provide a business with protection against improper competitive activities. What is important is that in the flush of success at having secured a new employee, what might happen if it goes wrong should not be overlooked.
Roger Byard is a partner at Cripps Harries Hall LLP
