As an employer, you can use restrictive covenants in employment contracts to important “legitimate business interests” after an employee leaves. For example, restrictive covenants can:
Protect your confidential information
Prevent an ex-employee from unfairly competing with you
Prevent an ex-employee from dealing with your customers or clients
Stop an ex-employee from destabilising your workforce by poaching your other employees
In short, restrictive covenants are an extremely valuable business protection tool. So why do many employers have restrictive covenants in employment contracts but, when they really need to rely on them because of the behaviour of a former employee, find themselves in the position of being told that they are “not actually enforceable”?
Here are a few practical observations about employers’ use of restrictive covenants which, if followed, will leave your business much better protected. These tips are simple and fundamental; yet not all of them are widely understood.
What is the most common mistake that you see employers make when drafting new restrictive covenants?
Hands down, a director taking template wording “from the Internet” or from his or her “previous employer”, and just inserting that old wording into new employment contracts. Often, this wording has been kicking around for years. Or, without the employers knowledge, it may have been tinkered with so many times that, when analysed carefully, the wording has become inconsistent or even non-sensical.
If you are going to have restrictive covenants which have the best chance of being enforceable when you need them, they have to be bespoke to your organisation. More particularly, they should be bespoke to each role that you will use them for within your organisation. And, ideally, particularly with customer facing sales employees or senior employees, they should then be reviewed each time the employee changes role.
Do employers tend to create post-employment covenants which last too long?
Yes, very much so.
Courts will only uphold covenants which provide “reasonable protection to legitimate business interests”. In the world of protecting customer/client connection, it’s the “reasonable protection” bit that employers often fall down on. If a restrictive covenant goes further than is “reasonable”(e.g. because the period of protection bargained for by the employer is too long - let’s say 24 months after the employee leaves, when a “reasonable” period of protection would have been 12 months) the whole covenant will be declared unenforceable, and the employer is left with no protection. So it’s often better to err on the side of caution by having a covenant of a shorter duration than perhaps you would ideally like, so that you can be much more confident that a court would actually enforce the covenant when the time comes.
I know we can give restrictive covenants to new employees. But can we introduce restrictive covenants to the contracts of our present employees, if they don’t already have them?
You can - but you have to be really careful.
Care is needed because, in law, any change to any contract (including employment contracts) has to be “supported by mutual consideration” for the contract change to be valid and enforceable. Legally, “consideration” just means “value”. Even if the existing employees accept your proposed restrictive covenants (which not all will), if they are given nothing of value in return, the covenants may not be enforceable because of an “absence of consideration”.
The consideration given to the employee does not have to be huge but it does have to have genuine value. Many employers considering introducing restrictive covenants do so as part of negotiations in connection with a salary increase or job role change. If that’s not practical, some employers are willing to make small one-off payments so that they can be sure that the new covenants are enforceable. If you do that, it should be carefully documented.
This need for mutual consideration is one that is frequently overlooked. And it’s so important because it might mean that a restrictive covenant which is reasonable and so would otherwise be enforceable, simply will not be enforceable by the courts.
I know we can put restrictive covenants in employment contracts. But can we also put restrictive covenants into the contracts we have with our self-employed consultants?
There is nothing to stop you doing this, and the covenant will have a good chance of being enforceable provided that it genuinely “goes no further than is reasonably necessary to protect legitimate business interests”.
You should be aware however that the existence of restrictive covenants which might, by their nature, restrict a person’s ability to work elsewhere after they stop working with you, is one factor that is likely to be viewed by HMRC as an indicator of “employed” rather than “self-employed” status for tax purposes.
For how long after an employee leaves can restrictive covenants protect us?
There are a number of variables. One is the type of covenant. For example, covenants which prevent an employee from competing at all in a given marketplace, called “non-compete covenants”, are generally harder to enforce. Certainly, much more so than what are known as “non-solicitation and non-dealing” covenants which only prevent business contact with the employer’s specific customers as opposed to restricting all competitive activity within the market. Sometimes, the reasonableness of the period of restriction for non-compete covenants can be correspondingly shorter than would be permitted for non-solicitation / non-dealing.
It also depends on the sector you are in, and the job role that the ex-employee had. Taking a non-solicitation and non-dealing covenant for a senior sales employee as an example, broadly speaking, the court would consider how long it would reasonably take an employer to find a replacement for the ex-employee, onboard and train them, and allow that new employee enough time to forge broadly equivalent relationships with customers.
It is dangerous to use “rules of thumb” in this area, but restricted periods of between 3 months and 12 months are the most common. But the reasonableness of the period really does depend upon the particular facts. Generally speaking, a post-employment restricted period beyond 12 months would require a very good business specific justification for such a lengthy period of restriction.
Should we give post-employment restrictive covenants to all of our employees?
For covenants which prohibit the use of your confidential information during employment and after employment ends, generally yes.
For covenants which prevent the ex-employee from competing, or from dealing with your customers or poaching your staff, a role by role analysis is the better approach to determine whether those covenants are actually necessary. Generally, it’s not a good idea to give those covenants to everyone if they are not really relevant to everyone; and courts tend not to take a positive view of employers that do so.
People Law are here to help if you are considering creating restrictive covenants for those who work in your business, or enforcing restrictive covenants against a former employee.
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