The UK jobs market is booming and employers across many sectors are struggling to recruit the staff they need. It is probably not a coincidence that over the last year we have seen an increase in enquiries from employers regarding employee competition concerns.
A typical concern is where a key employee is leaving and is going to join a competitor. This can lead to anxieties about the employee being an asset to the competitor and potentially disclosing the employers’ confidential information, such as strategic business information or details of customers, to the competitor.
This article is the first in a two-part series considering clauses in employment contracts that help protect an employer from the damage that might be caused by an employee joining a competitor. Such clauses are usually known as restrictive covenants.
What to protect?
Every business will have information that it considers both confidential and commercially sensitive. Restricting the use of this information by employees after their employment has ended may be vital to protect the business from having its information exploited by a former employee.
Given the current market, it is worth remembering that restrictive covenants can also be used to protect the stability of your workforce, by limiting the ability of the ex-employee to encourage others to leave as well.
What are restrictive covenants?
Restrictive covenants in employment contracts seek to prohibit an employee from competing with the ex-employer after the employee has left employment. This can be done in different ways, including:
- Non-compete clause – this prohibits an employee from working for a competitor or establishing a competing business.
- Non-dealing – this prevents the former employee from dealing with the ex-employer’s customers.
- Non-solicitation – this prevents the ex-employee from approaching customers of the ex-employer (the difference to the non-dealing provision is the latter applies regardless of who approached who, while solicitation only prohibits the employee from making the approach).
- Non-poaching of employees – this prevents the former employee from soliciting other employees to leave their employment.
As restrictive covenants are inherently anti-competitive, as they seek to stifle competition by the ex-employee, courts will only enforce restrictive covenants where the covenant is assessed to be no wider than is reasonably necessary to protect the employers’ legitimate interests.
This involves an assessment of the restriction and the surrounding circumstances. It is not possible to give an exhaustive list of factors that will be taken into account, but commonly a court will assess the following:
- The length of time of the restriction. The restrictions must be limited in time, normally measured from termination of employment.
- For a non-compete restrictive covenant, the scope of the geographical area to which the restriction applies.
- The employee’s level of influence over customers.
- The employee’s involvement in, and knowledge of, the employer’s affairs. A senior employee is more likely to have knowledge of commercially sensitive or
strategic information than a more junior employee is.
- The employee’s influence over colleagues.
So a one size fits all approach to restrictive covenants risks the clauses being unenforceable for most, if not all, of your employees.
We often hear a perception that restrictive covenants cannot be enforced. This is not the case and we can point to regular law reports showing the lengths some employers, and courts, are prepared to go to enforce restrictive covenants against former employees and, often, their new employers.
But if you want to have restrictive covenants in your employment contracts that you know you can rely on if the need arises, then we recommend investing at the outset in getting in place tailored restrictive covenants that will withstand any challenge for the ex-employee in court, should that ever be necessary.
We suggest devoting time to thinking about what specific interests the business wishes to protect and, for each key employee, what type of restriction(s) are needed to provide reasonable protection. If you wish to impose, for example, a 12 month non-compete restrictive covenant, you will need to consider and be prepared to answer:
- Why 12 months is necessary, rather than nine or six months; and
- Why is a non-compete needed, given that this is the most onerous restriction for the ex-employee, compared to a non-dealing or non-solicitation provision.
In part two next month we will consider some of the common pitfalls that we see when employers seek to implement restrictive covenants or then enforce them. We will also look at the challenges presented by social media in protecting employers’ confidential information from exploitation by ex-employees.