What should I consider when taking on an employee who has Restrictive Covenants from their former employer?

I recently had an enquiry from an employer who was concerned about the potential repercussions on the Company, if their new employee breached the terms of the Restrictive Covenants contained in their employment contract for their former employer.

It is not uncommon for employers to restrict their employees from contacting or working for clients of the business, and in some industries, employers consider it appropriate to prevent employees from working for another competitor for a specific period after their employment terminates.

Claims for breach of restrictive covenant can be costly and time consuming, and the former employer can pursue a claim against both the employee in breach, and the new employer, if they consider the new employer has induced a breach of contract.

What is Inducement?

This is where the employer encourages and assists their new employee to breach the terms of their restrictive covenants.

Employer’s need to be very careful, as if they are aware of the breach and do not take action, it is possible the former employer will bring a claim against the business. The reason for this is the business is more likely to be able to pay the costs and damages awarded, in the event the claim is successful, than the employee who is in breach.

So, what protections should you put in place to protect your business from this type of claim…

1. Ask a candidate if they are bound by any restrictions.

During the later stages of the recruitment process, it would be reasonable to ask a candidate if their employment contract contains any restrictive covenants. It is likely their contract will contain a clause stating the employee is required to inform you of the restrictions and provide you with a copy. Therefore, if an employee fails to comply with this clause, they will be in breach of contract.

2. Once the candidate has accepted the role

Once the candidate has accepted the role, ask to see a copy of the restrictions (if you have not already been provided with a copy), this will enable you to fully understand the restrictions and the measures required to protect the business.

You will also at this stage, provide the candidate with a contract of employment. I advise that your contract contains a warranty that they are able to perform their duties under the contract, without being in breach of any restrictions or court orders. If the candidate later breached this term, then they would be in breach of contract with you, and you could action this accordingly.

3. Discuss the Restrictions with the new Employee.

Once you are aware of the restrictions, discuss them with the employee and ensure they fully understand them, as well as the potential repercussions on the business, were they to breach any of the restrictions. I would also recommend you follow this up in writing, as this will assist in demonstrating the measures you put in place to prevent a breach, which would weaken a potential claim by the former employer for inducement.

4. Seek Legal Advice

If you are concerned about the restrictions your new employee is bound by, then you should seek legal advice either on the measures to put in place or on the enforceability of the restrictions themselves.

A Court of Appeal case highlighted that an employer who reasonably believes the restrictions are unenforceable, following legal advice to this effect, would have a defence to a claim for inducing breach of contract.

5. Take Action

If an employee breaches the terms of their restrictions, it is possible you may know nothing about it, until you receive a letter before action from their former employer.

Do not ignore this correspondence, as matters could escalate quickly. Confirm that you will investigate the allegations and respond to them fully, following the outcome of your internal investigation.

The letter may also require you and the employee to sign an undertaking, confirming you will not commit any further breaches, and if this is the case, I would recommend you seek legal advice before signing or responding.

Discuss matters with the employee, if appropriate, and if considered necessary conduct an internal investigation to determine if there is any merit in the former employer’s claims. It may be reasonable to suspend the employee on full pay, while this investigation is undertaken and follow the Company’s disciplinary process, if there is evidence of a breach.

Following the outcome of your internal investigation, confirm to the former employer what action you have taken, and provide any relevant evidence which demonstrates the measures put in place to prevent a breach of the restrictions. This could potentially stop a claim for inducement being issued against you, and if a claim is issued, it can be used as evidence to illustrate the unreasonableness of the claim being issued.

If you have any queries relating to restrictive covenants, please do not hesitate to contact a member of the team, we will be happy to assist.

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