Restrictive covenants: a must for departing senior employees

Restrictive covenants are a valuable device for employers keen to protect their commercial interests when a key member of staff leaves. They enable restrictions to be placed on what employees can do in the months following their departure, including preventing them from poaching customers, setting up on their own in direct competition or going to work for a rival.

The crucial role played by restrictive covenants was acknowledged by the government in February this year in its formal reply to the Taylor Review on Modern Working Practices, with such provisions described as “a valuable and necessary tool for employers to use to protect their business interests”.

Michael McNally employment law expert with Warners Solicitors in Kent explains why, as an employer, the use of restrictive covenants in employment contracts is so important and what to do if agreed restrictions are ignored.

‘As an employer, you will have worked hard to establish your business, build a brand, deliver good service and develop a loyal customer base. You will have invested time and money and it is only fair that you reap the rewards’, says Michael McNally. ‘However, behind every prosperous business there is usually a talented pool of employees whose knowledge and expertise has contributed to your success. There is nothing you can do to stop these employees leaving and using their talents elsewhere, but there are things you can do to stop them exploiting your business for their own gain.’

How restrictive covenants work

Restrictive covenants are designed to protect your legitimate business interests by restricting what former employees can do once they have left your employment. They can also be used to restrict the activities of existing employees.
Typically, restrictive covenants will be inserted into employment contracts or service agreements with more senior members of staff. To be enforceable, they must be reasonable by reference to the business interest they are seeking to protect and go no further than is necessary to achieve that aim.

In most cases this will mean that the use of restrictive covenants is targeted at the protection of trade secrets, confidential information, intellectual property rights and customer and supplier lists. Such covenants are usually enforceable.

In appropriate cases, however, an employer may impose restrictive covenants which are generally only enforceable for a limited time after the employee has left and only prevent activities within a defined geographic area. Such restrictions may prevent a former employee poaching any staff or just members of a particular team, or from bidding on any contract for which the employer has tendered or just those contracts on which the employee has worked. They may also prevent former employees from contacting your customers and suppliers.

Only restrictions which are appropriate for the employee in question can actually be enforced. Blanket, standard provisions applied across the board, irrespective of the employee’s role, cannot.

How to enforce a restrictive covenant

Your ultimate recourse if an employee acts in contravention of a restrictive covenant is to sue them for breach of contract and to ask the court to:

  • compensate you for any loss you have suffered as a result of the breach;
  • oblige the employee to account to you for any profit or other advantage they have gained through their actions; and
  • if appropriate, to force the employee to comply with the terms of the covenant going forward or else stop them from committing any further breach, via the use of an injunction.

However, before making a claim at court, it is advisable to consider whether the employee could be persuaded to comply with their obligations – and if appropriate, to pay you any necessary compensation – without the need for litiagation. This is something your solicitor can explore with you.

The thing to always bear in mind is the importance of reacting whenever a breach occurs. Doing nothing, or failing to take action quickly, runs the risk of implying that you have no objection to what is going on. It also sends out the entirely wrong message to other employees who may be tempted to follow suit.

Restrictive covenants, if drafted properly, are a valuable weapon in your armoury and should be deployed and enforced whenever needed.

If you require advice on restrictive covenants, and in particular their enforcement, please contact Michael McNally on 01732 770660 or email [email protected]

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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