Are Restrictive Covenants a Waste of Ink?

Employees have a general implied duty not to compete with their employer’s business or solicit their customers during employment. Having said that, there have been a number of cases where courts have found that dismissal for setting up a competing business during employment was not always deemed to be gross misconduct. It must be truly galling for an employer to have a finding of unfair dismissal for dismissing employees who have set up in competition whilst still working for them.

The same duty of loyalty does not apply post termination. For that reason many employers - worried that a former employee with good customer relationships or business contacts may take that knowledge to a competitor - include a post-termination restrictive covenant (‘non-compete’ clause) in their terms of employment. The clause makes reference to employees not being able to for a specified time period, solicit, approach or engage with former customers/clients, work for a nearby competitor or set up in competition. Provided they are very moderate and limited in their terms and no more than strictly necessary to protect the business they are enforceable, but it is for the employer to make the running in such cases and they are very difficult to enforce.

Restrictive covenants have recently become the topic of discussion as the Department for Business, Innovation and Skills (BIS) is trying to protect small businesses and entrepreneurs across the UK. Since any removal of rules about non-competition will also apply to the fragile start-up business they are now trying to protect, I’m afraid I foresee another muddled but well-meaning pig’s ear ahead .......

There are views that restrictive covenants stifle British entrepreneurship as they inhibit start-ups from taking the top and sharpest talent. BIS believes the clause deters individuals from moving to a competitor or even setting up their own business. In response, they have asked for views from individuals and employers alike to whether this type of practice is suppressing innovation and employment.

Emma Jones, founder of Enterprise Nation, has said in response: “Entrepreneurial individuals need to be able to ease out of employment and into self-employment so a move to look into how employment contracts reflect this and the modern economy is warmly welcomed.”

In reality, how much do they stifle entrepreneurial growth? The answer is probably “not much”. Many people regard non-compete clauses as a waste of ink. They are prima facie void as being contrary to the public interest i.e. limiting a person’s ability to earn a livelihood. To be enforceable restrictions post-termination must be limited to the particular business activities that compete with the employer’s business and which the employee caries out, the relevant geographical area; and a reasonable period of time.

If you use non-compete clauses, ensure they have been drafted tightly and individually to reflect the particular employment relationship rather than inflicting one generic clause for all. As a general rule I only use limitations on working for competitors or setting up a competing business for very senior people, R&D and direct sales or field services people. There wouldn’t be much point in restricting a Junior Sales Administrator, for example.

Any limitations must be reasonable. What is reasonable will depend on the job the employee did and the nature of the business. Sales people may have a big territory so you might cover the whole territory but only for a fairly short period of time, for example, three months. In other cases limiting working to a half a mile radius of the employer’s premises is more than enough. You must also ensure the restriction is genuinely to protect the interests of your business.

Each restriction should be expressed separately to reduce the risk of having the entire clause voided if the worst does happen and your restrictions has to stand up in court. This will ensure a judge will only void that particular restriction and consider the rest.

Putting an outgoing employee on garden leave or transferring him to other duties is a valuable and more realistic alternative to a restrictive covenant. You can use garden leave to reinforce client relationships before the employee leaves while keeping the employee out of the picture. If your terms of employment don’t give you the right to put an outgoing employee on garden leave, then you are probably not entitled to keep the employee at home. The employee has a right to work. Note that garden leave can be enforced by an injunction.

Most importantly, you should be regularly reviewing your terms of employment to ensure that employees are signed up to contracts that are relevant and specific to them. So, in the classic case of the mail room boy who ends up as the CEO, it is always essential to make sure that new covenants are entered into or current covenants re-executed with each job advancement.

We deal with the good, the bad and the ugly of HR. If you need help resolving problems with out of date restrictive covenants, double dealing employees or any other HR issues, give us a call on 01908 262628.

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