Keeping hold of employees is one of the greatest challenges business owners face, especially when the typical British worker changes jobs six times.
This trend is far more prevalent among younger workers, who only expect to stay in a job for less than three years – that equates to around 20 jobs over the course of their working lives!
As job-hopping increases, so does the need to protect your business from ex-employees potentially harming your company. If they move to a competitor or lure other team members to join them, it can undermine your position and deliver a crippling blow to your bottom line.
To protect your business, employment contracts often contain restrictions on employees that apply after termination of their employment, otherwise known as post-termination restrictions – or ‘restrictive covenants’ in legal-speak. Yet despite having a signed employment contract, these restrictive covenants might not hold up in court.
Before taking on a new employee, entrepreneurs need to know how to how tighten up their contracts, without breaking the law.
Restrictive covenants 101
Restrictive covenants are intended to stop someone from doing something in the future. Although relatively common, they run against a person’s right to trade freely on terms that they choose. The law is very particular about what you can do as an employer, to ensure that restrictions don’t amount to an illegal restraint of trade.
Common types of restrictions
Restrictive covenants cover a broad range of activities, including restrictions on an employee:
- joining a competitor or starting their own competing business (non-compete);
- stealing your employees (non-poaching); or
- engaging with your key customers or suppliers (non-solicitation/non-dealing).
The variables at play
The rule of thumb is that any restriction must protect legitimate business interests and they must be reasonable. The most common variable is time, or the duration of the restriction – the longer the duration, the harder it will be to enforce.
Take non-competes for example: we often see them lasting from three to six months. But trying to enforce anything beyond that can be a struggle. Exceptions do exist for particular industries where longer periods are more common and justifiable. The seniority and remuneration structure of an employee might also justify pushing out the time limit.
An example of this emerged a few years ago a court ruled that a 12-month non-solicitation covenant was reasonable for a senior insurance broker due to the nature of the insurance industry and its renewal cycle.
Geographical restrictions, such as regional or country-wide restrictions are also common. Again the bigger they are, the harder they are to justify. So don’t try to prevent an employee competing anywhere in the UK with your London-based medical practice – it won’t fly in court.
So what next?
Get re-acquainted with your employment contracts. Read and understand the restrictive covenants in them and decide whether they give your business enough protection, within the legal limits.