In Part one of our two part series on restrictive covenants last month we considered what a restrictive covenant is and some of the factors that a court will take into account when considering whether a restrictive covenant can be enforced or not. You can read the first article here.
In this second part of our restrictive covenant series, we consider some of the pitfalls for employers to avoid, including ensuring that restrictive covenants are incorporated into the contract in the first place, how to go about updating covenants for existing employees and some of the challenges presented by social media.
As with any contractual term, for the employer to rely on it, it needs to be incorporated into the employment contract.
The simplest way of doing this is to include the covenants in the employee’s contract of employment and ensure that they sign and return it around the start of employment.
We sometimes see restrictive covenants applying to all staff in a staff handbook. Whilst it is possible for the handbook, or part of it, to form part of the employment contract, this approach does present some risk.
Firstly, you will need to be sure that your handbook and each employee’s employment contract are consistent as to whether or not the handbook forms part of the contract. This can become challenging to keep track of over time, as different versions of the handbook are produced and updates are made to your template employment contract.
The second risk with this approach is that, as pointed out in part one of this series, restrictive covenants should be tailored to the role, and the employer’s business. On this basis, a one size fits all approach to restrictive covenants is unlikely to work and the court will take this into account when assessing enforceability.
Updating restrictive covenants
There may be occasions where employers wish to update restrictive covenants for existing employees. For example, on promotion or transfer to a new role, or where the covenants become out of date following expansion or other changes to the employer’s business activities.
As with all contractual terms, restrictive covenants may only be amended in accordance with the terms of the contract or with the agreement of all parties.
You might have thought that an employee agreeing to the change by signing up to new terms would be sufficient. However, where a change to the contract is to the employee’s detriment, then in order for it to be a valid variation, the change must be supported by some “consideration” from the employer. In other words, the employer must give something to the employee in return from them agreeing to the new restrictions.
If an employer is carrying out a general updating exercise to restrictive covenants then it can be very difficult to show that there was some consideration. In contrast, if the new covenants are being imposed further to the employee’s promotion or pay rise, then consideration can usually be established by showing that the promotion or pay rise was at least partly in return for the employee agreeing to the new restrictions. It is important that this can be evidenced. So the correspondence concerning the promotional or pay rise should make it clear that it is conditional upon the new contract being signed.
Repudiatory breach by employer
It is a general principle of English contract law that if an employer is in repudiatory breach of the employment contract, then the employee is released from any terms of the agreement that are intended to go beyond termination. This would include restrictive covenants.
So as an employer you need to tread carefully when considering dealing with the dismissal or departure of a key employee who could compose a competitive threat after termination. You should not do any of the following unless you have got the clear contractual right to do so:
- Put the employee on garden leave;
- Summarily terminate and pay in lieu of notice; and
- Withhold any outstanding commission or bonus payments.
Getting this wrong can mean that the employee is free from all restrictive covenants.
Solicitation by social media?
As we saw in Part one, a common restrictive covenant is to prevent the ex-employee from soliciting customers after they have left.
Solicitation is traditionally understood to occur where the former employee approaches customers with a view to obtaining their business on behalf of their new employer or their new own competing business. This normally requires the ex-employee to do something and could be evidenced through phone records, emails or text messages.
However the availability of social media, such as LinkedIn, makes it far easier for the ex-employee to advertise to your customers, who may be connections on their social media profile, that they have moved to a new employer or set up a new business. For example, this could be done through actively posting or just updating contact details, which may appear in the news feed of their connections.
Whether this amounts to solicitation in breach of any restrictive covenants is an area that is still up for debate, as the law seeks to adapt to the social media environment.
Some guidance could be taken from a case involving a partner who left a firm of chartered accountants. It was stated that a communication that does no more than inform a client that an employee has left his employer is not solicitation, even if it contains the address of the former employee, and even if it is sent in the hope that the client will transfer his custom.
This was a 1997 case, pre-social media, but by analogy it could be that a simple change to a LinkedIn profile would not amount to solicitation. But this may depend on the circumstances and the way in which business is transacted in that employee’s sector. For example, tighter restrictions may be imposed on sectors that rely heavily on social media connections, such as recruitment, compared to others.
However any active encouragement to connections to enquire with the employee’s new business may still amount to solicitation.
We hope you have found this series on restrictive covenants useful. Restrictive covenants can be enforced and can be a very useful tool to prevent a departing employee from unfairly competing with your business. Litigating restrictive covenants can be expensive and time consuming, so it is important to have correct and tailored restrictions in place to start with, so that you know you can rely on them should they be tested in court.