News & Events
In his latest article, Mike Wilson, partner in our Litigation and Dispute Resolution team explores claims by employers to enforce post-termination restrictions against departing employees.
It is a common misconception among both employers and employees that restrictive covenants are ‘not worth the paper they’re written on’. In fact, well drafted restrictive covenants can be incredibly valuable to a business when a senior employee leaves to join a competitor, set up in competition or in the case of a team move. The after-effects of the COVID-19 pandemic, and now the cost-of-living crisis in the UK, have seen greater movement in the job market with upwards pressure on wages, increased recruitment and more businesses looking to poach teams of employees from their competitors. As a result of this, restrictive covenants have become a hot issue- with legal disputes between employers and their former employees on the rise.
It is a longstanding principle of law in this country that every individual has a right to freedom of movement and to earn a living. As a result, the starting point is that any contractual term restricting an employee’s activity after their employment ends is void for being in restraint of trade and contrary to public policy. However, this subject to the important exception that such a term will not be void if the employer can show that it has a legitimate interest to protect, and that the protection provided by the term is no more than is reasonable. This is the foundation of the law as it relates to restrictive covenants. In simple terms, if a term is reasonable it will be enforceable and if it is unreasonable it will be void and unenforceable.
Employees often have access to sensitive commercial data and can form strong relationships with customers, suppliers and other staff, so when an employee leaves to join a competitor, or to set up on their own in competition, the biggest threats to that business are:
- that the departing employee will take and use or disclose its confidential information for the benefit of their new employer, or their own competing business;
- the need to protect its trade connections with its customers, clients and suppliers, and more generally its goodwill; and
- to maintain the stability of its workforce, i.e. to avoid losing other employees.
A common example is the salesman who leaves to join a competitor and takes with him a list of customers (confidential information). He then contacts those customers and encourages them to move their business to his new employer. He might also encourage other employees to join him, exacerbating the damage to his former employer.
Even in the absence of any restrictive covenants, the law provides some protection to employers. All employees have an implied duty of fidelity to their employer, also known as a duty of good faith or of loyalty. This includes, among other things, a duty not to disrupt their employer’s business, not to compete and not to solicit their customers or suppliers. Those duties continue during (but not after) an employee’s employment, including any period of garden leave. An employee can take preparatory steps to set themselves up in a rival business, provided they are not in active competition, for example by diverting customers or business to their new employer.
All employees also have an implied duty of confidentiality, i.e. that they will not disclose their employer’s confidential information or trade secrets to third parties or use that information for their own purposes. Again, this applies only during their employment. Confidential information includes any information which an employee is told is confidential or is obviously confidential. Typical examples include customer or client lists, pricing information, commercial reports and strategic plans. Trade secrets are a special kind of highly sensitive information that are protected by an implied duty of confidentiality even after termination of employment. Trade secrets might include, for example, secret processes of manufacture such as chemical formulae, designs or special methods of construction. There are many widely known examples, including the Coca-Cola recipe and Google search algorithms.
Some very senior employees, particularly directors (including non-statutory directors) and senior executives or managers, may also owe fiduciary duties to their employer. Fiduciary duties go even further and require an employee to act solely in the interests of their employer and not in their own interests. This extends to a duty to report their own wrongdoing and that of others.
An employee who takes steps during their employment to compete, or to give themselves or their new employer a competitive advantage, may be liable to their employer for breach of these implied duties. The new employer or new business might also be liable for inducing or procuring that breach, or for conspiring with the employee to cause harm to their previous employer’s business.
If an employer wants to extend their protection after an employee has left the business, they can do so using restrictive covenants. A restrictive covenant is a clause in an employee’s contract that prohibits them from competing with their employer or from soliciting or dealing with customers or suppliers, or poaching staff, for a period of time after termination of their employment. This can allow a period of time for the departing employee’s replacement to settle in and cement those important relationships. Restrictive covenants can also be used to extend the protection of confidential information beyond the end of the employment relationship.
For a restrictive covenant to be enforced, it must be incorporated into the employee’s contract of employment. This is most easily achieved by including it in a written contract and requiring the employee to sign it at the start of their employment, although restrictive covenants can sometimes be found in a side letter or staff handbook. Problems can arise if the contract is not signed or where restrictive covenants are introduced later in the relationship.
An employer should impose a restriction that is no wider than reasonably necessary to protect a legitimate interest, i.e. its trade connections, confidential information and the stability of its workforce. If a restriction is too wide – in terms of the restricted activities themselves, the period or geographical extent of the restriction – it will be treated as void.
Contrary to popular belief, there are no fixed rules on what is and isn’t enforceable. Each case will turn on its own facts but relevant factors include the nature of the employee’s role, their seniority, status and whether they were involved in negotiating the wording of the covenants. Generally, it will be easier for an employer to enforce a more onerous restriction against a more senior employee. There is no maximum duration for restrictive covenants, but a period of more than 12 months is unlikely to be enforceable in most cases and, in some cases, even a shorter period of 3 or 6-months may be too long. Restrictive covenants are most effective when they are tailored to the circumstances of the particular employee, rather than a standard set of restrictions that are applied across the board.
If an employer has reason to believe that an employee has breached (or will breach) their restrictive covenants, or their duties whilst still employed, the most common remedy sought is an injunction, which is an order of the court preventing any further breach and stopping the employee in their tracks. An application may also be made for ‘delivery up’ of confidential information.
An employer can also claim a financial remedy or damages if they can show some loss resulting from the breach, such as loss of profits on contracts or opportunities diverted by the employee.
In some cases, the employer may also be able to obtain ‘springboard’ relief, which is a form of injunction used to prevent an employee, or their new employer or business, from dealing with certain customers, or even from competing or trading altogether, for a period of time to negate any unfair competitive advantage or head start gained by the former employee’s actions and level the playing field.
The most important factor in bringing a successful claim is evidence. The employer must be able to produce some evidence that the employee has breached, or is likely to breach, his or her duties or their restrictive covenants. This can come in many forms, but will often include evidence obtained from computers or mobile phones, sometimes forensically, that an employee has copied or taken confidential information or solicited customers whilst still employed. It might also include witness evidence from customers or other employees.
Once an employer becomes aware of an actual or potential breach, it is important to act quickly to secure evidence and to determine the best strategy to protect its position. Recent case-law has shown an increased willingness by the courts to uphold restrictive covenants in favour of employers, particularly in cases where employees have been shown to have conspired together or with their new employer to breach their duties and in cases involving team moves between competing businesses.
Mike Wilson is Partner in our Litigation and Dispute Resolution team. If Mike and the team can assist you and your business with legal advice that is tailored to your particular requirements, talk to the team today by calling 01482 325242 or email firstname.lastname@example.org.