Restrictive Covenants in Employment Contracts
Background
Even with well drafted restricted covenants in employment contracts some employers are understandably ambivalent about them. Enforceability is fact sensitive with the result they are sometimes challenged to the point where they become meaningless. In addition, employers know there are significant costs associated with issuing injunctive proceedings. Employers often ask – what’s the point?
Why have Restrictive Covenants in Employment Contracts?
Restrictive covenants are worth including in contracts of employment for some employees. At the very least, their inclusion will make an employee think carefully about joining a competitor and/or poaching customers. In some cases just the presence of restrictive covenants may be enough to make an employee lie low until the restrictive period has passed. This provides the employer time in which to reinforce customer relationships and recruit new personnel.
Introducing Restrictive Covenants
Restrictive covenants ideally need to be entered into at the recruitment stage as problems can arise once the employment has started. Importantly, there must be consideration for securing restrictive covenants. At the recruitment stage it is the job offer, however it could be a promotion, or even the payment of a sum of money.
Employers need to remember that enforceability of any restrictive covenant are assessed at the time when they are entered into, not at the time when the business wants to enforce them. So it is no use having a junior employee enter into extremely onerous covenants which go beyond the organisation’s legitimate business needs at the time. Unfortunately it is very common for employers simply to use blanket restrictive covenants without having any regard to the seniority of the employee, and the extent of any client facing role. Employers should, therefore, regularly review restrictive covenants as the employee becomes more senior. Promotions present an ideal opportunity to do this.
Other small but equally important points include making sure the restrictive covenants actually make sense; getting signed contracts back from employees, and keeping the duration reasonable in length.
Restrictive Covenants and Termination
If the employment contract is well drafted then consideration needs to be given about whether to invoke a garden leave clause for the duration of the notice period; or exercise a contractual PILON. Either way employers need to make sure they do not do anything which would amount to a breach of contract thereby rendering any restrictive covenants as unenforceable.
If an employee leaves to join a competitor, or to set up a competing business it is also worth investigating whether there has been any breach of confidentiality.
Employers faced with restrictive covenants breaches need to act decisively. Unless there is a need for an injunction the starting point is a letter of claim, including a requirement for the employee to give contractual undertakings about future conduct. At the same time any prospective employer (where appropriate) will need to be put on notice if there is evidence of it inducing a breach of contract.
Court proceedings
If a breach persists there will be little choice other than to seek a High Court injunction. Injunctive proceedings are by their nature high pressured situations both in terms of the principles at stake, and the need for intensive management time. Given the procedural and legal issues involved specialist help is a prerequisite.
The Future
The Government is currently consulting about both whether introducing statutory provisions whereby restrictive covenants are only enforceable if the employer continues paying remuneration during the restricted period and, more controversially, banning them altogether.