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Restrictive covenants: a must for departing senior employees

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Restrictive covenants are a valuable device for employers keen to protect their commercial interests when a key member of staff leaves.  They enable restrictions to be placed on what employees can do in the weeks and months following their departure, including preventing them from poaching customers, setting up on their own in direct competition or going to work for a rival.

The crucial role played by restrictive covenants was acknowledged by the government in February this year in its formal reply to the Taylor Review on Modern Working Practices, with such provisions described as "a valuable and necessary tool for employers to use to protect their business interests”.

Tony Irving, dispute resolution expert with Hancock Quins in Watford explains why, as an employer, the use of restrictive covenants in employment contracts is so important and what to do if agreed restrictions are ignored.

As an employer you will have worked hard to establish your business, build a brand and develop a good service offering and loyal customer base.  You will have invested a lot of time and money and it is only fair that you reap the rewards’, says Tony.  ‘But behind every prosperous business there is usually a talented pool of employees whose knowledge and expertise has contributed to your success.  There is nothing you can do to stop these employees leaving and exploiting their talents elsewhere, but there are things you can do to stop them piggybacking off your business for their own gain.’

How restrictive covenants work

Restrictive covenants are designed to protect your legitimate business interests by restricting what former employees can do once they have left your employment.  They can also be used to restrict the activities of existing employees.

Typically, restrictive covenants will be inserted into employment contracts or service agreements with more senior members of staff.  To be enforceable, they must be reasonable by reference to the business interest they are seeking to protect and go no further than is necessary to achieve that aim. 

In most cases this will mean that the use of restrictive covenants is targeted at the protection of trade secrets, confidential information, intellectual property rights and customer and supplier lists, and in helping to preserve your remaining workforce.

In appropriate cases, it may also mean that they only apply for a limited time after the employee has left and only prevent activities within a defined geographic area.

Restrictions imposed may be general or specific, depending on the circumstances.  For example, they may prevent a former employee poaching any staff or just members of a particular team, or from bidding on any contract for which the employer has tendered or just those contracts on which the employee has worked.

Only restrictions which are appropriate for the employee in question can be enforced.  Blanket, standard provisions applied across the board, irrespective of rank or role, cannot.  

How to enforce a restrictive covenant

Your ultimate recourse if an employee acts in contravention of a restrictive covenant is to sue them for breach of contract and to ask the court to:

  • compensate you for any loss you have suffered as a result of the breach;
  • oblige the employee to account to you for any profit or other advantages they have gained through their actions; and
  • if appropriate, to force the employee to comply with the terms of the covenant going forward or else stop them from committing any further breach, via the use of an injunction.

However, before making a claim at court, it is advisable to consider whether the employee could be encouraged to comply with their obligations – and if appropriate, to pay you any necessary compensation – on a voluntary basis.  This is something your solicitor can explore with you. 

The thing to always bear in mind is the importance of reacting whenever a breach occurs.  Doing nothing, or failing to take action quickly, runs the risk of implying that you have no objection to what is going on.  It also sends out the entirely wrong message to other employees who may be tempted to follow suit.  

Restrictive covenants, if drafted properly, are a valuable weapon in your armoury and should be deployed and enforced whenever needed.

If you require advice on restrictive covenants, and in particular their enforcement, please contact Tony Irving on 01923 650853 or email tirving@hancockquins.co.uk.

The contents of this article are for the purposes of general awareness only.  They do not purport to constitute legal or professional advice.  The law may have changed since this article was published.   Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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