Constructing Employment Contracts to Protect Your BusinessPosted in : HR Updates on 11 February 2013
The new year brings an opportunity to take a fresh look at HR strategy and within that, the framework of policies, processes and procedures which support business / organisational strategy.
For most businesses and particularly within increasingly competitive markets, it is good practice to re-look at the construction of your employment contracts. This is especially true when you are a business which relies heavily on your employee’s specialist knowledge and/or client contacts (or a selection of them). It can be legitimate for a business to seek to limit the loss or damage done when an employee moves on to a competitor or starts up on their own, by including contractual clauses which prohibit or ‘restrict’ the ex-employee from using certain knowledge or client contacts built up whilst in your employ. Restrictions must however be justifiable and carefully constructed in order for the employer to be able to rely upon them in court.
Strictly speaking, any ‘post-termination’ restriction on an employee is legally void and therefore it is important to note from the outset that a business does not have an automatic entitlement to protect itself against competition from ex-employees.
Restrictive Covenants Defined
A restrictive covenant is essentially a contractual clause which prohibits an employee from competing with his/her ex-employer after the employee has moved on from the business, or using knowledge of those customers/contacts gained during his/her prior employment. Such covenants, which are expressly written into the contract, may deter employees from joining competitors and discourage potential new employers from poaching your people.
In order for the restrictive covenant to be enforceable it must;
- be designed to protect legitimate business interests; and
- extend no further than is reasonably necessary to protect those interests.
Such clauses may be enforced to protect a legitimate business interest such as trade secrets, trade connections, confidential information or a stable workforce but will not be valid if they exist simply to stifle or prevent competition.
For a restrictive covenant to be enforceable, it must also not be drafted too widely. It is, therefore, good practice to consider the following when reviewing the construction of such a clause;
- The breadth of the geographical area of any restriction and length of time of the post-termination restriction. It is unlikely that a very large or wide geographical area will be justifiable.
- In terms of timescales, any restriction which lasts for more than 6-12 months will be difficult to justify.
- The type of interest being protected, e.g., trade secrets are often granted wider protection than client information. An employer is likely to be required to evidence any connection between the employee and any information / trade secret that is being protected.
Given that senior employees are often exposed to more confidential or sensitive information, restrictions placed on them are often a standard term in their contracts. However, one-size fits all clauses are to be avoided in order to minimise the risk that they become unjustifiable and therefore unenforceable.
The standard types of restrictions which can be used by employers are:
- non-solicitation covenants – which prevent poaching of clients/customers/suppliers of the former employer. Generally, the covenant should be restricted to customers etc that your employee had contact with during a specified period before they left.
- non-dealing covenants – which prevent a former employee from dealing with former clients/customers/suppliers, regardless of which party approached the other. This type of covenant has a clear advantage as it avoids the need to prove that the former employee made an approach, which is usually difficult to show. However, it does broaden the prohibition and consequently may make it more difficult to enforce.
- non-competition covenants - restrictions on the former employee working in similar employment for a competitor, for example, where your former employee’s influence over customers or suppliers is so great that the only effective protection is to ensure they are not engaged in a competing business in any way.
- non-poaching covenants – which prevent an employee poaching former colleagues. Usually this should be restricted to employees that operated at the same or a more senior level to the ex-employee.
What happens when the clause is breached?
If an employer believes there is evidence to suggest that a restrictive covenant has been breached, they may seek a temporary injunction and delivery or destruction of confidential information. The injunction will have the effect of ceasing the activity of the ex-employee until evidence can be presented and heard in a full hearing in court. If financial remedy is sought by the employer, then they must demonstrate the loss in terms of profit or potential contracts as a result of the breach. Immediate legal assistance is advisable as soon as a breach is suspected.
Why ask someone to go and do some gardening?
Garden leave clauses are often used alongside restrictive covenants to achieve maximum protection in the event of the resignation of employees privy to valuable information. “Garden leave” is the term given to a situation whereby the employee is required to serve out a period of notice at home (or “in the garden”). During this period the employee continues to receive all salary and benefits but is prohibited from commencing employment with new employers until the gardening leave period has expired. It is a practice which employers may choose to adopt when the employee is leaving to join a competitor.
During the gardening leave period the employee’s access to such information or customers is either restricted or denied. The duration of the Garden leave clause will be subject to a test of reasonableness. The leave provides the opportunity for the employer to put a distance between the departing employee and the customer base and trade information and allow for a replacement to come on board and establish themselves.
Top Tips for Employers
To rely on such clauses employers need to ensure that they have appropriately drafted the clauses in their contracts of employment. Legal action against ex-employees can be time-consuming and expensive. The employer should gather as much evidence as possible, such as emails and phone logs and seek immediate legal advice. The ability to negotiate a satisfactory settlement will rely on both the justifiability of the clause itself and the strength of the evidence demonstrating that the clause has been breached.
Unilateral changes to employment contracts cannot be made without an employee’s consent. It is important to note that contractual terms are binding in law and any change without consent may lead to claims for breach of contract and the potential for a claim of constructive dismissal. Employers who vary terms (or add new terms) without consent also risk being unable to rely on other contractual terms given that the original contract will no longer be valid if breached. If you are hoping to include new clauses to existing employee contracts you must seek agreement.
The information in this article is provided as part of Legal-Island's Employment Law Hub. We regret we are not able to respond to requests for specific legal or HR queries and recommend that professional advice is obtained before relying on information supplied anywhere within this article.