Restrictive covenants - are they worth it?
- Date: Thursday 17th December 2020
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As consultants, we usually recommend the consideration of a ‘non-compete’ clause in employment contracts, particularly for individuals who work in strategic and / or business development roles. But how enforceable are these contractual terms in reality?
A non-compete clause usually addresses several risk factors:
The individual may join a competitor
You can put restrictions into your terms and conditions that stop employees from taking up employment with a direct competitor. However, employers must be reasonable when making such a request and the clause may ultimately not be enforceable.
For example, if you employ a site manager and ask them not to work in the construction industry within 100 miles of their current workplace for at least six months after leaving your employment, you are ultimately telling them either to move or not to work which is unreasonable.
However, if you employ a hairdresser and ask them not to work in the same town or run their own business in direct competition with yours for a minimum period of three months, the chances are a court would deem this condition reasonable.
The individual might introduce their new employer to existing clients – essentially taking business away from you
This is by far the biggest risk when losing good people to a rival, and one that can be dealt with using restrictive covenants.
You can make it part of the employee’s terms and conditions of employment not to solicit / contact / poach any business from you when working with a competitor for a set timeframe. You can explicitly state that they are not allowed to contact any clients they have worked with over the past, say, 18 months (for example).
Should they be in breach of this rule, you can file a civil claim for loss of business against the individual’s new employer.
Enforcing this clause would mean making it very clear from the outset that you will monitor client movements and follow up any concerns, legally if necessary. You may also want to contact the individual’s new employer, should they be in breach of their terms not to work for a direct competitor.
As an aside, when taking on new staff, you may wish to consider quizzing them on the restrictions they are under due to previous employment – you may find yourself on the other side of the fence!
The individual may approach other staff members to tempt them away from you
You can be very clear about this in your terms and conditions and any non-compliance could entitle you to compensation.
Ultimately, it is down to the staff member to apply for a job elsewhere. But if you have evidence that an introduction was made by a former staff member, you have the right to challenge this.
However, in reality very few employers choose to pursue this since solicitors’ fees could easily outweigh any potential pay-out.
Prevention is better than cure on this one – make sure you maintain open channels of communication with your staff. An engaged workforce will give you the heads-up on anything untoward and hopefully display loyalty by giving you the opportunity to intervene.
The individual may disclose trade secrets, strategic data etc.
This may be relating to you or your client base and is an automatic breach of your confidentiality rules. All employees, regardless of their level of responsibility, should be briefed on induction on the importance of confidentiality. Ensure this is covered in your data protection policy and / or your employee handbook and that everyone has signed up to it.
Breaching the rules not only breaches their contractual terms, but also data protection legislation and can in extreme cases lead to a criminal charge against the individual. Criminal charges may also be brought against you, the data holder. It is therefore imperative that your processes around data control are tight and leavers are asked to return any data in their possession and removed from your access groups.
Source: Manuela Grossmann