Restrictive Covenants

Background

Even with well drafted restricted covenants some employers are understandably ambivalent about them. Enforceability is fact sensitive with the result they can sometimes be 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?

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 gives 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. There must be consideration for securing restrictive covenants. At the recruitment stage its the job offer, however it can be a promotion, or the payment of a sum of money.

Employers also need to remember that the extent of any restrictive covenants is assessed at the time when they are entered into, not at the time when the business wants to enforce them. Therefore, employers need to reguarly review restrictive covenants as the emplyoee becomes more senior. Promotions present an ideal opportunity to do this.

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 then 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.



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