The start of the New Year can be a busy time for recruitment, with many employees looking for a fresh start or a new challenge. With any new recruits, employers need to think about ways to protect their business – one of the key points being whether to impose restrictive covenants on employees if they subsequently leave the business.
As an employer, you will know that employees often access and use important information relating to your business, such as confidential information, business strategy and customer data, and they also build relationships with customers and other staff members. If and when they depart your business, they may try to use this information or their relationships to benefit their new employer (who may well be a competitor in the same field) or to set up their own competing business – which can of course cause serious damage to your business.
Although there will usually be some terms within the contract of employment which protect your business during employment, these generally don’t tend to apply once the employment relationship comes to an end.
You will, therefore, need to consider if, depending on the nature of the business and the employee’s role, you need to impose restrictive covenants to protect your business for some time after the employee departs. The challenge with these types of clauses is that they restrict what employees can do after their employment ends, so it’s important that they are drafted carefully. This will ensure they have the best chance of being enforceable at court if you do have to take action.
Some key points to note are:
Restrictive covenants should ideally be included within an employee’s contract of employment. You should, therefore, consider if restrictions are required at an early stage, when an employee is joining your business, and should review and update them if anything changes, for example where an employee is promoted to a different or more senior role.
It’s myth that restrictive covenants are ‘not worth the paper they are written on’. Courts do enforce them, but only if they have been properly drafted and don’t amount to an unreasonable restraint of trade.
Remember that restrictive covenants will not be appropriate for everyone – you might be concerned with the future activity of a salesperson, manager or director, but not necessarily with a cleaner who doesn’t handle important information. Restrictive covenants should be tailored to specific circumstances and individuals/roles.
The starting point is to establish exactly what you are trying to protect. You need to have a legitimate interest to protect – this might include things like trade connections with customers or suppliers, confidential information and maintaining a stable workforce and key personnel.
You should then ensure the restrictions don’t go any further, and are not any wider, than necessary to protect that legitimate interest – this is key for any restrictive covenant to be seen as reasonable and enforceable. This will, in turn, inform the type of restrictions which are being imposed, as well as the length of each restriction and whether they should be limited to any particular geographical location.
Finally, think about which type of restrictive covenants are necessary in each case. Instead of always seeking to impose a non-compete clause (which prevents an employee from joining or setting up a competing business), consider if this is actually needed or if your goals can be achieved by relying on less restrictive clauses, such as a non-solicitation or non-dealing clause (which prevents an employee from approaching or dealing with your customers) or a non-poaching or non-employment clause (which prevents an employee from taking key personnel to another business).
You will also have to ‘watch this space’, as the Government recently carried out a consultation on proposed reforms to using non-compete restrictive covenants in employment contracts. This was part of the Government’s drive to support economic recovery from the impact of COVID-19 – it was concerned that widespread use of such clauses restricts innovation and competition. The consultation ran from December 4, 2020 to February 26, 2021 and sought views on two main proposals: changing the law so non-compete clauses are only enforceable if employers provide compensation to employees for the restricted period; or, alternatively, making all non-compete restrictive covenants in employment contracts unenforceable (in other words, having an outright ban).
Although we are still awaiting the outcome of the Government consultation, use of non-compete restrictive covenants may be restricted in the future. This would affect the drafting of new employment contracts, with many employers having to revisit or update their existing contracts of employment.
As you can see, this is a tricky and specialist area of law with many potential pitfalls. The key is to take a tailored approach, find the right balance and draft the restrictive covenants in way which give them the best chance of being valid and enforceable.
If you are looking to protect your business and need advice, Howes Percival Solicitors has a leading, expert employment team who are happy to help.