How to protect your interests if an employee leaves you for a competitor
David Woods, January 15, 2010
In this challenging economic climate, there has never been a greater need for employers to protect their businesses and to retain clients. The need for effective restraints on employees leaving the business has never been stronger. Many employees will have valuable knowledge about customer contacts, technology and strategic business information - all of which will be an attractive asset to any competitor seeking to encroach on your market.
The key to protecting your business from these catastrophic consequences is to ensure the employee's contract of employment contains well-drafted clauses, restricting activities following the termination of employment. These clauses are commonly known as restrictive covenants and are found in employment contracts, partnership agreements and directors' service agreements.
The law will not enforce a restrictive covenant merely to stop competition or enforce a restriction that unreasonably prevents someone from pursuing their career. But the courts will protect an employer's legitimate business interests and enforce restrictive covenants that are reasonable in the circumstances and which go no further than necessary to afford protection to the business.
Typically, restrictive covenants will include the following clauses:
- ‘non-compete' - restricting a former employee from working for a competitor (usually within a certain geographical area)
- ‘non-solicitation' - preventing the former employee from poaching existing or prospective customers or clients
- ‘non-dealing' - preventing the former employee from dealing with former customers or clients (regardless of which party approaches the other)
- ‘non-poaching' - preventing the former employee from poaching former colleagues to join his new employer
- ‘confidentiality' - preventing the former employer from passing on confidential information or trade secrets to his new employer.
Restrictive covenants will only be enforceable for a reasonable period of time following the termination of employment. Restrictions lasting longer than six months are generally considered to be unreasonable. However, restrictive covenants lasting up to 12 months may be justifiable where the former employer's business is part of a niche industry or if the former employee is very senior or has specific technical expertise. A restriction, which may be reasonable for a senior employee, may not necessarily be reasonable for a more junior member of staff - so one size does not fit all.
What action can you take if a senior employee resigns and announces he is going to work for a competitor? Providing the employment contract contains a garden leave clause, the employee can be expected to stay away from the workplace, on normal salary, for the length of his notice period. The restrictive covenant can then commence at the end of the period of notice, providing an additional period of protection for the employer. It is also advisable to write to the employee (and the new employer if their identity is known) reminding them of the restrictive covenants and informing them of your intention to enforce these covenants by legal action in the event of a breach.
What steps can you take to enforce restrictive covenants? The only way to enforce restrictive covenants is by a court order, which is a costly and time-consuming process for all parties concerned. Initially, the most common remedy will be to apply to the court for an interim injunction. If granted, this will stop both the former employee and new employer in their tracks to prevent a breach, pending a full court hearing. Alternatively, it may be possible to reach a negotiated settlement with the former employee and new employer, whereby formal undertakings not to breach the restrictive covenants are agreed. If an amicable solution cannot be reached, the court will scrutinise the reasonableness and length of any restriction an employer is seeking to impose on a former employee, taking into account the business interests they are seeking to protect.
Two significant court cases highlight the way in which courts have considered restrictive covenants. In Wincanton vs Cranny the company sought to impose a 12-month restriction on its former European operations manager, which stated that he could not have any involvement in any business in the UK that competed with any business carried out by the company. The court refused to enforce the restriction because it extended beyond the particular field in which the employee had been personally engaged.
By contrast, in Dyson Technology Ltd vs. Strutt, Dyson sought to enforce a restrictive covenant on a former engineer in its research and development department, which placed a 12-month restriction on him from any ‘involvement, in any capacity, with any business which is similar to and competes with any business with which the employee was concerned in the 12 months before termination'. In this case, the court decided that both the geographical limit and the 12-month restriction were reasonable because of the international nature of the Dyson business and the type of confidential information being protected.
It is impossible to predict with certainty whether or not a restrictive covenant will be enforced by the court. If a restrictive covenant is too broad the court will not rewrite the clause to make it enforceable and nor will it imply reasonable limitations. However, where a restriction goes only so far as is necessary to protect a legitimate business interest, then it is likely to be successful.
Joanna Cowie is head of legal at HR Insight