How to devise a clear strategy for enforcing restrictive covenants
The days of post-termination restrictive covenants not being worth the paper they are written on are long over. However, businesses frequently struggle when considering whether the restrictions in place are in real terms enforceable and, if so, how to enforce the restrictions immediately and for the long-term benefit of the business.
The law considers post-termination restrictive covenants to be a restraint of trade. This default position has led to departing employees/ new employers believing that restrictions are unenforceable. Employers must establish that the presumption is wrong and illustrate definitively that the restrictions protect a genuine business interest and provide reasonable protection.
The fundamental position should always be to tailor your restrictions to your business needs. You want to be absolutely sure that the restrictions would be enforceable by the courts. Your key restrictions will be non-dealing, non-solicitation, non-competition and non-disclosure of confidential information.
The key to enforcing your restrictive covenants is to have your game plan in place pre-exit:
- consider whether placing your employee/ employees on garden leave would keep them out of the market for a certain period - and that you have the right to place them on garden leave
- ensure you have the right to monitor email/mobile phone/download activities by your employees
- close off potential arguments about fundamental breach of contract/constructive dismissal - they may attempt to allege that your treatment of them permitted their immediate exit and the contractual restrictions fell away
- check your evidence - injunctions are not granted lightly, any judge will want unequivocal evidence of breach or anticipatory breach
- upon exit write formally to the employee/team and their new employer confirming you will be relying on the restrictions and explain why they are enforceable
- seek undertakings by the employee/new employer that no breaches will take place, confirm that immediate injunctive relief will be sought where undertakings are not provided, followed by full injunctive relief and damages moving forward
- continue to collect evidence before and immediately after the resignation/termination
- remember your customers/clients - keep your marketing strategies in place and wherever possible do not involve them in potential litigation
The most effective way to enforce restrictions and be acknowledged as a business that will not tolerate breaches is to get your strategy in place from day one:
- Check your restrictions
- Continually monitor employee activity, internal/external communications, emails/information downloads
- Ensure that no single employee (where possible) has key contacts which cannot be replicated internally on termination
- Put personnel in place to inform the departing employee of his obligations and write to the employee and new employer without delay
- Put in place retention payments where applicable. Your business can then potentially claw back payments ‘owed' to the employee in the event of breach - this is effectively a loyalty payment which falls away upon breach
If a breach does take place and you have no option but to consider litigation always assess your case first - now is not the time to litigate if you are not confident of success. If there are flaws, consider settling quickly to minimise risk and prevent the restrictions being tested in court. Where it is possible to do so, litigate where your case is as strong as it can be in terms of the restrictions you have in place and evidence of breach available to you.
Choosing your strongest case gives you the ability to market a ‘win' internally and externally showing (i) your restrictions work (ii) breaching them will result in damages and/or injunctive relief, and (iii) the employee and the new employer will be ‘on the hook' for losses incurred by you and effectively kept out of the market for the period of the injunction.
The market perception of your business is vital. A strategy from day one in the context of enforcing restrictive covenants and taking an unequivocal stand against your ex-employees and their new employers will be of material benefit to you both immediately and in the future should other employees attempt to jump ship and take part of your business with them.
Elena Cooper is associate in the employment team at Dundas & Wilson