Restrictive covenants can provide powerful protection for businesses threatened by competition from former employees or directors, but they are often perceived as unenforceable.
When an employee or director leaves a business, they carry with them the risk of using your confidential information and the relationships they have built up with your customers, potential customers, key employees, and clients for their own personal gain – or that of a competitor. By having a robust suite of restrictive covenants, however, you can protect your business from unfair and unlawful competition.
Restrictive covenants are a contractual tool regularly enforced by the courts to protect legitimate business interests, such as customer relationships or workforce stability. There are several different kinds, the most useful of which are non-compete restrictions. These essentially prevent a former employee or director from competing with your business for a certain length of time. Other types of restrictive covenants can also prevent said employee or director from soliciting – or even communicating with – key customers, as well as poaching staff members or teams for their new venture once they leave.
To be enforceable, however, restrictive covenants need to be carefully thought through when drafted, with particular care given to ensure that their stipulations do not exceed what is reasonable. Should they go too far or make demands that don’t protect a legitimate business interest, they will be unenforceable. Furthermore, restrictive covenants deemed unreasonable or intrusive will not be redrafted by the courts, essentially making them worthless.
In practice, this means limiting restrictive covenants to key clients, customers, or contacts with whom the person leaving may have had regular dealings and covering only the work or areas of the business in which that person was involved. Restrictive covenants should also come with a time limit: six months is relatively standard for non-compete restrictive covenants, but this can be stretched to 12 for more senior employees. Restrictive covenants can also be limited to covering the geography or territory in which that individual did business or had responsibilities, although this is less relevant these days.
All these points must be considered carefully at the drafting stage and regularly reviewed and updated, not least because they will be assessed on their reasonableness at the time into which they were entered, not the point when they are to be enforced. If a director of a company leaves, for example, but joined the company (and therefore signed the restrictive covenants) as an office junior, the reasonableness of the covenant will be assessed against the role and responsibilities of an office junior, not a director.
Covenants can be updated, and the best way to do this is to review and refresh them at key points during that person’s tenure, such as a promotion. Ideally, however, reviews should be every two years to keep on top of legal developments and revisions should be linked to increased benefits that the employee receives, such as salary reviews.
An express confidentiality clause in employment contracts is also important. Unlike restrictive covenants, they do not come with a time limit and help set out what assets an employee must return when they leave, as well as any knowledge that must be kept confidential. Bear in mind, however, that a common law definition of confidential information will apply to any employment contracts that do not include their own and will be limited to information that is likely to count as a trade secret. This does not always extend to customer details and pricing information, so to ensure these are covered, it is worth seeking advice on drafting a confidentiality clause that is tailored to your business.
Working together, enforceable restrictive covenants and confidentiality provisions provide wider options to protect your business from unlawful competition by former employees/ directors who are either breaching covenants or using confidential information to compete.
If you’ve obtained evidence that a former employee is soliciting key customers – and thereby breaching a non-solicitation covenant – you can take steps to obtain an injunction against them. Essentially, this prevents them from soliciting or dealing with customers by forcing them to comply with the covenants and leaving them in contempt of court if they do not. You can also bring a claim in damages for any losses caused to your business by their unlawful actions.
For more serious breaches of covenants, such as obtaining confidential information dishonestly and using it to steal business, you may be able to obtain a search order. This order is made ‘without notice’ to the defendant and allows your solicitor to enter the former employee’s home and/ or new place of work to retrieve confidential information and evidence of wrongdoing, whether in hard copy or on electronic devices. As search orders are used to preserve evidence, however, they are usually granted only when there is a risk that a former employee will become aware of the application and destroy any information that they took.
Undoubtedly your business will handle a wide variety of sensitive data, whether this be customer/ client information, pricing and margin information or technical data regarding the services you provide. This data belongs to your business, not an individual employee. Even if that person retains that information in their head rather than in writing, it is confidential to your business and should be protected as such. There is a range of options available to protect your business from unlawful competition, but careful drafting and regular review of restrictive covenants and confidentiality clauses are vital to ensure your business has the protection it needs. Put yourself in a strong position now, and you can be confident that your restrictive covenants will support your business, should they ever need to be enforced.