Restrictive Covenants
The Problem
This subject is undeniably dry and the implications for most people will not be obvious!
Yet, whether they realise it or not, restrictive covenants are a major issue in the employment contracts of many of our members.
I said in my last newsletter that it didn’t make sense to spend hours poring over a new iPhone agreement with Apple but that it would certainly pay to scrutinise an employment contract.
One good reason is that you may be being asked to accept (or may have already signed up to) restrictive covenants that limit what you can do when your employment ends. This may not seem important now or you may be desperate for a new job and be prepared to accept future restrictions; but you do at least need to be aware of what you’re signing.
This newsletter obviously only describes restrictive covenants in general terms and if you think you may be concerned please contact the Advice Team for more specific advice.
What Is A Restrictive Covenant?
Organisations have a quite legitimate wish to protect their intellectual property, stop their staff being poached or lose the product of years of work on customer acquisition.
One way in which they try to do this is by including post-termination restrictions in their employees’ contracts. These restrictions are known as restrictive covenants and in this context come into play when employees leave for new jobs.
Typical post-employment restrictions include clauses to prevent employees:
1. Enticing employees to leave and join a competitor.
2. Taking with them customer data.
3. Soliciting their employers’ clients.
4. Disclosing trade secrets.
How Easy Is It To Enforce A Restrictive Covenant?
That will depend on whether the court accepts that the covenant reflects a legitimate business interest.
In this area the courts have an important role in protecting employees against excessive employer power and protecting the public interest by preventing firms stifling disclosures in the public interest and innovation in business.
Importantly, courts will look to satisfy themselves that any post-termination restrictions are entirely necessary to protect the employer’s legitimate interests and are proportionate to those interests. An employer will not be able to rely upon restrictive covenants that are more widely drawn than is necessary and reasonable.
Employee’s Obligations
In outline, employees owe some well-established duties to their employers.
The most obvious perhaps is the duty of fidelity (loyalty or faithfulness) where employees must behave honestly, act in good faith and neither compete with their employers nor misuse confidential information. Employees must also not make secret, personal profits using their employer’s resources. Amongst other things, these duties mean for example that employees can’t without permission:
1. Run their own businesses during their working days when they are being paid by their employers.
2. Use their employers’ tools, machinery, raw materials etc. for personal profit.
3. Set up in competition with their employers.
4. Entice their employers’ staff to work for their competitors.
5. Use information they obtain during the course of their employment for purposes other than those intended by their employers.
6. Steal their employers’ assets including customer details and other ‘intellectual capital’ such as ideas or inventions. Here there is another related obligation; the duty of confidence.
So, the duty of fidelity concerns the duty of employees to have regard to the interests of their employers and act in good faith. Employers will try to protect themselves against breaches of this duty by using restrictive covenants.
Some employees are in special positions of trust, for example some company directors, and they have additional fiduciary duties, such as requirements to disclose their own failings or wrongdoing and ensure they work with undivided loyalty. Not many members will find themselves in that situation.
After Employment
Post-termination things are different.
Then, an ex-employee can certainly compete with his previous employer, solicit staff away from that employer or approach previous clients and use knowledge he or she gained whilst in employment (provided it doesn’t amount to a trade secret); unless the employee has accepted post-employment restrictions.
The position with fiduciary duties will be very much case-dependant and is beyond the scope of this newsletter.
Some Examples
Example 1
I mentioned in an earlier newsletter a case where a firm had asked a prospective employee to accept a restrictive covenant that would have prevented him selling investment products anywhere in Yorkshire for a period of 12 months, post-termination.
This was a term that was almost certainly unenforceable because the geographical area was too widely drawn and would, in effect, have prevented the individual plying his trade for a clearly excessive period of time. Employers won’t be permitted to enforce restrictions simply to prevent competition; they would have to demonstrate that the restrictions were necessary to protect something the company owned e.g. its customer lists or trade secrets.
Probably, the employer’s only legitimate interest lay in preventing the individual stealing its customer data or soliciting or dealing with customers with whom he had dealt whilst working for that employer. Thus, it was likely that the proposed covenant would be seen as neither proportionate to any threat to the employer’s business nor necessary to protect the employer’s legitimate interests. A time limited, non-solicitation/non-dealing clause applying to a smaller geographic area would have made more sense and been more likely to be enforceable.
Example 2
In another case the employee was required not to solicit the business of any actual or prospective client of his previous employer, a bank.
The employee contacted a business contact of the bank and, in introducing himself, referred to a previous meeting during his employment with the bank.
The potential client contacted the bank which threatened legal action for breach of the post-termination restriction preventing solicitation.
Summary
Don’t accept restrictive covenants without getting advice from us first. No one can tell you with total certainty what will and won’t be enforceable but we can give you advice that will allow you to make an informed decision; either when you’re considering a new job offer or thinking about the implications of your current contract.
Please contact the Union’s Advice Team on 01234 716005 and we’ll be pleased to help. Do however bear in mind that normally we won’t be able to give immediate answers on this issue because we need to look in detail at what is being proposed. For that reason, the sooner you are able to contact us the better.