Restrictive covenants are 'here to stay' finds, study of financial sector firms
David Woods, March 26, 2012
While there are many employers in the City who might dismiss restrictive covenants, 83% of financial sector business included them in their employment contracts and four out of 10 (42%) supported the view that breaches and alleged breaches do get challenged.
Almost six out of 10 (59%) of respondents adopted a blanket - or 'industry standard' - approach to restrictive covenants, and only 27%referred to their restrictive covenants as being subject to negotiation or amendment. In other words, most respondents were using an off-the-shelf approach.
The research is timely in light of the recent High Court defeat suffered by wealth management firm, Towry, in its poaching claim against Raymond James.
Towry claimed James, and seven financial advisers who joined James, had solicited its clients. But Towry failed to distinguish between the "non-solicitation" clauses in the seven advisers' contracts and the stronger "non-dealing" clauses it had imposed on other advisers. The result was a resounding victory for Raymond James and the advisers.
Alex Denny, partner and leader of the employment practice in the London office of Faegre Baker Daniels, which acted for Raymond James and the advisers in the Towry case, said: "Restrictive covenants certainly have their drawbacks. They can be expensive to enforce and, if they are not carefully drafted, will have no legal benefit, as the Raymond James case illustrates. That said, the courts have shown themselves increasingly willing to enforce covenants where these are necessary to protect a legitimate business interest of the former employer.
"Our survey shows that restrictive covenants are here to stay but that companies are becoming increasingly creative in their efforts to hold on to key clients and employees."
But the report also revealed restrictive covenants are not the only way to tie in staff. Increasingly, financial services firms are using more creative devices such as the use of garden leave clauses and deferred remuneration.