Restrictive Covenants: how to avoid problems with former employees.
The UK’s economic and business landscapes have experienced some major shifts and trends over the past few years. This includes the impact of the COVID-19 pandemic and other external factors, but also trends such as ‘silent quitting’ and ‘job hopping’ which has seen many businesses lose employees at all levels to other companies and competitors.
It is common practice for a business to have policies and practices in place to protect its reputation, confidential information, and clients. However, when an employee leaves a business, especially a high-level and/or long-standing employee, this protection is weakened, and the business becomes exposed. This is especially the case when an employee moves to a competitor, frequently and for more money.
You might be thinking that your business is immune from such weaknesses on the basis that most of your employees leave on good terms and without any problems. Wrong. Even in the situation where the employer-employee relationship has ended mutually, the risk remains. The current trend for job hopping employees is that they are moving for more money and, potentially, enticing promises from their new employer. With such promises and pay increases comes the potential for them to breach their contractual obligations with you, innocently or otherwise, and put your business and its information at risk.
So, what can your business do to protect itself?
What is a Restrictive Covenant?
First, to understand how a restrictive covenant works and how your business can utilise them, it is important to understand what they are.
Restrictive covenants are usually found in an employee’s Contract of Employment (or similar document) and/or any documentation effecting their leaving of the business (such as a Settlement Agreement or Redundancy Agreement).
So, what do they do? To paraphrase the famous ‘Ronseal’ slogan, they do as they say on the tin. They are covenants (formal promises/agreements) that restrict an employee from doing something once they leave the business’ employment. In the main, there are four main types of restrictive covenants:
1. Non-compete covenants: these attempt to stop the employee from joining a competing company, usually for a period of X number of months.
2. Non-poaching covenants: these prevent the departing employee from poaching and taking with them other employees of the company.
3. Non-soliciting covenants: these prevent the former employee from contacting and/or enticing the business’ clients or customers to follow away from the business.
4. Non-dealing covenants: these go further than the non-soliciting covenants and prevent the departing employee from having any dealing whatsoever with the business’ clients and customers (including acting on any independent approaches by the client or customer).
It should be noted that if your business wishes to include restrictive covenants in their employees’ contracts/exiting agreements, great care must be taken with the drafting of the provisions as there are strict rules about the reach and scope of a restrictive covenant (such as the length of time and geographical scope). Should a covenant fall foul of these rules then it will likely be deemed invalid.
These rules are outside the scope of this guide, but you should always seek independent legal advice when putting together restrictive covenants, especially if it is the first time your business is using them in documents.
How to use Restrictive Covenants
Even from a very brief introduction to what restrictive covenants are, it is clear that they can be a very useful tool to a company in protecting its confidential information, employees, and customers and clients.
However, how can a business use them and what steps should be taken both before and after an employee leaves?
Before an employee leaves?
The first thing to do is make sure the employee will be subject to the appropriate restrictive covenants your business desires. To this, your business should check the current contractual documents with the employee to see if they are subject to such provisions.
If they are, you should make sure the employee is fully aware of the restrictive covenants by referring them to the provisions and/or incorporating them into any departure documents. Nonetheless, clear written evidence should be produced to demonstrate that the employee is fully aware of the existence of such provisions and their impact.
If they are not, it is important that the relevant provisions are incorporated and included in any departure documents, such as a Settlement Agreement.
After an employee leaves?
Once an employee has left the business, this is where things become tricky. This is because the business’ ability to monitor their behaviour and conduct is reduced. However, all is not lost, and things can be done by the business.
First, the business should monitor, if possible and appropriate, the former employee’s behaviour online (including LinkedIn and other social media) to make sure they have, amongst other things, not moved to a competitor nor attempted to contact any of the business’ clients or customers. It goes without saying that any such monitoring should only be what is appropriate.
Secondly, the business should monitor any internal trends such as other employees leaving and joining the same company as the departed employee and/or any customers and clients (particularly those who might have worked closely with the former employee) leaving the company. Should such trends become apparent, careful consideration should be given at the earliest opportunity as to whether this is coincidence (such as the other company offering your employees large pay rises) or if something else might be afoot.
Whatever happens, it is important that you try and compile as much evidence as possible to demonstrate that the former employee might be the cause of the issues faced.
What happens if there is a breach?
What should your business do if they find themselves in the position whereby a former employee has (or is threatening to) breach their restrictive covenants?
If your business finds itself in this position the most crucial thing (along with evidence of the alleged breaches) is timing – you must act quickly to prevent the breach(es) from continuing and to stop any losses increasing.
In the first instance, your business should write to the former employee reminding them of their restrictive covenants (enclosing a copy of the document(s) containing the covenants), raise with them the concerns held by the business, provide them with the evidence of the alleged breaches, and request that they stop all infringing activity immediately.
If this doesn’t result in the business obtaining its desired outcome, legal advice should be sought immediately. Legal experts, such as those at Geldards LLP, can provide your business with the necessary legal advice and outline the potential next steps to protect your business. This could mean the solicitors writing to the former employee (and any solicitors they have instructed) and/or, if necessary and appropriate, issuing legal proceedings against them.
However, due to the nature of the breach, legal assistance and proceedings might be required urgently and correspondence alone might not be appropriate. Examples of such situations might be the former employee poaching your business’ biggest customer. If such breaches occur, your business should seek legal advice immediately because such remedies as injunctions may need to be considered and sought.
Should the former employee be found to have breached their covenants, there are several remedies available to the business should the matter proceed to Court or not. These include, but not limited to:
2. Undertakings – these are legally binding promises to do or not to do something.
3. Injunctions – interim or final.
4. Claw back of monies paid to the former employee under any Settlement Agreement or other agreement should the conduct amount to a breach of that agreement.
In summary, restrictive covenants can be an important tool in a business’ arsenal when it comes to protecting itself and its confidential information and assets from former employees. This is regardless of whether said employee left on good terms or not.
However, businesses should not rest on their laurels and should be alert to potential breaches and act in a timely manner should any breaches occur.
If you or your business has any queries regarding restrictive covenants or similar matters, do not hesitate to get in contact with Geldards LLP’s specialist Commercial Dispute Resolution and Employment departments who are able to assist with a wide range of queries and matters.