It is worrying for business owners when an employee leaves their company. Will they work for a competitor, poach a client or divulge confidential information?
These scenarios can be avoided if properly drafted restrictive covenants are included in employment contracts. But how can they be as watertight as possible? Being reasonable is a good place to start.
Let’s start with the range of covenants available. There are confidentiality covenants, which stop the exposure of confidential information. There are ‘non-compete’ covenants that prevent former employees from doing a similar job for a competitor. There are covenants which stop former employees from speaking with customers and suppliers. There are also covenants that prevent former employees from poaching staff.
To enforce a restrictive covenant, employers need to show that:
1) They are protecting a legitimate business interest.
2) The restriction is no wider than is reasonably necessary to protect it.
So how can business owners achieve this?
Protecting a legitimate business interest
For a covenant to be enforceable, it must be capable of protecting a legitimate business interest. For example, a covenant preventing an employee from working for a competitor will be very hard to enforce unless there is very strong justification. Generally, the more specialized your business is, the more likely you can argue that it is impossible to protect your business interests with anything less onerous.
If you can rely on less onerous covenants, for example, to prevent the disclosure of confidential information, it is important to clearly define the information you wish to protect. That way it is easier to show that it amounts to a legitimate business interest. The court also needs to be satisfied that not only did the former employee have access to this information, but that it was not already in the public domain.
Seniority of employee
Generally, the more senior the employee or the more influence they have in a company, the bigger the threat to the employer’s legitimate business interests if they leave. Senior staff are more likely to have influence over clients or have access to sensitive information. They are also more likely to have been instrumental in the development of client relationships, which belong to the employer, not to them.
Specific and succinct
As well as being well defined, covenants should not be too wide. For example, you cannot restrict employees from taking any clients or customers. Instead, you should restrict it to clients that the employee has worked with for a limited period before termination.
Generally speaking, the shorter the period of the covenant the more likely it will be enforced. An acceptable amount of time is usually between 6 months to a year. Longer periods can be acceptable with very senior employees or where there is the sale of a business and the seller remains as a member of staff for a handover period.
Hiring someone under restrictions
Be aware of what could happen if you decide to hire a new employee who has restrictive covenants. They can still be liable for any breaches and can implicate you in a legal battle too.
When employees are promoted, always review their contracts and see if the existing covenants are still appropriate to their level and amend if necessary.
It’s always worth preparing for your employees’ departures, as they and your competition could jeopardise your business if restrictive covenants are not in place.