Restrictive Covenants - Careful wording or a waste of time?

Most contracts of employment have clauses which are collectively referred to as Restrictive covenants and these cover non-compete, non-solicitation and non-poaching.

Whilst these clauses take various forms, their purpose is to protect and safeguard the legitimate commercial interest of the business with a significant emphasis on the client base and preventing former employees from doing untold damage to a business by poaching customers, setting up in competition and recruiting former work colleagues.

Non-compete clauses prevent a former employee from competing with their previous employer, non-poaching clauses restrain a former employee from hiring former colleagues and non-solicitation clauses stop former employees from taking steps to encourage clients away from their former employer.

Whilst that all sounds quite straight forward, most such clauses then go into further detail in terms of the distance or radius in which you are prevented from setting up in competition or time scales within which you can’t approach clients or former colleagues.

At this point, the issue becomes less clear cut because whilst you can make the clauses so onerous that the person can’t do anything, the possibility is that in doing so, the clauses become so unreasonable that they become unenforceable.

It is common practice when a person leaves a business and the Company acknowledges receipt of the resignation that they will be politely reminded about their restrictive covenants and of the possible consequences if they should step out of line…..and often CEOs and MDs will say – at least that will send a “warning shot across the bows”.

Whilst, the Courts are not averse to enforcing well-drafted and reasonable restrictive covenant clauses against former employees, the emphasis is on the careful wording and the interpretation of the word “reasonable”. On the one hand this destroys the myth that such clauses are not worth the paper they are written on but the legal costs of bringing such actions can be prohibitive – begging the question – what price do you put on protecting your business?

Some say that by making such clauses as robust and restrictive as possible, this will act as a deterrent. Dare I suggest that it is not uncommon for employees to have such clauses in their contracts and because of their legal speak wording, they don’t actually understand what they are prevented from doing. Sales people tend to focus more on the commission clause than their restrictive covenants!

The business should be clear about what it is trying to protect – client listings, technical expertise, system or process design……Business is about relationship building – we build relationships with our clients because if we don’ they won’t do business with us and we build relationships with work colleagues. Such relationships may stray outside work and you can’t prevent a former employee meeting with an ex-client for a coffee. However, when that former employee tries to entice the client away from one Company and transfer their business to another Company, the restrictive covenants will cut in.

The employment contract should be drafted to include clauses which include restrictive covenants designed to protect legitimate business interests and, therefore, should be reasonable in all senses of the word.

It is not uncommon in some situations, often related to signing a settlement agreement, where the business will agree to release the employee from restrictive covenants. I recall a situation many years ago when drafting a settlement agreement, I asked the CEO if he was happy to release the employee from his restrictive covenants to which he replied “Adrian…..the guy was so ***** useless, the competitors are welcome to him”.

 

Article by Adrian Berwick.

Adrian Berwick provides HR support for business and if you want any support on issues relating to restrictive covenants, contact Adrian on 07885 714771 or e-mail info@abcommercialhrsolutions.com

 

 

 

 


News posted: 27/10/2017 by Adrian Berwick