Restrictive Covenants: Why are they important for your business?
I have been contacted recently by several employers who have run into difficulty with employees who have left to work for a competitor or to set up in competition and have started to contact the employer’s customers.
If you run your own business and particularly if you have started from scratch you will understand how hard it is to build up good customer relationships and build your business reputation; then to have someone come into your business and take your hard work and capitalise upon it themselves or for another employer can be heart-breaking.
Fortunately there is a way to minimise the potential damage to your business and to ensure that you protect your hard work, however in order to be effective you must consider carefully the legal issues that could arise.
It should be noted that the default position regarding post-termination restrictions is that they are a restraint of trade and are void. The reason is that a restraint of trade is contrary to public policy. However post-termination restrictions (known as ‘Restrictive Covenants’) are permitted if the employer can show:
1) that there is a legitimate proprietary interest to protect;
2) that the protection sought is no more than is reasonable with regards to the interest of the employer, employee and the public interest.
What can an employer protect?
An employer can protect a legitimate proprietary interest which includes things like;
• Customer lists
• Customer connections
• Supplier connections
• Goodwill generated with customers and contacts
• Confidential information
• Trade secrets
• Stability of the workforce
How wide can the restriction be?
A restriction should be reasonable and no wider than is necessary to protect the legitimate interest. This means that the employer must be able to show that it is reasonable in the circumstances, and not so wide as to prevent competition altogether.
How can we determine what is legitimate & not too wide?
Each restriction and business interest will be analysed on the particular facts, there is no one size fits all, however there have been numerous cases which have developed over time where particular restrictions and circumstances have been assessed by the Courts.
Ultimately the reasonableness of your restrictions, if challenged, will be assessed on a case by case basis, and this is why it is imperative that if you genuinely want to protect your business, you do not take a clause from the internet or use one copied from another contract.
Can I prevent the employee from working for my local competitor?
At one time geographical non-competition clauses were really popular, the clause typically prevented an employee from working in competition within a certain area defined by miles or city boundaries. In some circumstances employers would include clauses preventing employees working in competition within the UK.
Although these clauses may be enforceable in certain situations, my advice to clients currently is to move away from these types of restrictions and focus on exactly what they want to achieve by the restrictions.
What action do you need to take?
1) Check your employment contracts to see if you have any post-termination restrictions to protect your business.
2) Check that the restrictions you do have are sufficient for your business and will stand up in Court if you have to use them.