Barrister Charles Price highlights what employers need to know when trying to prevent departing employees working for the opposition, and considers whether your restrictive covenants are effective in law.
An employer can limit the activities of former employees by including express contractual restraints in their contracts of employment. These covenants usually involve clauses prohibiting non-solicitation of ex-clients or preventing an individual from working with the opposition.
However, a restraint will be enforceable only if it can be shown to be reasonable, i.e. no wider than necessary to protect the employer’s legitimate business interests. As discussed below do not hope to prevent your defecting workforce from working with your rivals for the foreseeable future or gagging them indefinitely when it comes to approaching clients.
Non-competition clauses
Before deciding whether a restrictive covenant is enforceable, the judge will go through two steps. Firstly, the court will look to see if the information that the employee was privy to was of a confidential nature. There would be no real point in seeking to prevent a labourer from working with a rival as they are unlikely to be exposed to vital company information.
If the court is to decide that a non-competition clause is reasonably necessary for the protection of the employer’s interest in confidential information, the employer needs to show that, at the time of entering into the employment contract, the nature of the proposed employment was such as would expose the employee to information of the kind capable of protection beyond the term of the contract – i.e. trade secrets or other information of equivalent confidentiality.
For an example of such information deemed capable of protection in a recent case, a managing director of an insurance broker’s was deemed privy to confidential information relating to the firm’s business development, its exploitation of new geographical markets and new areas of business within social housing, and pricing and financial information relating to clients and insurers.
That information was not in the public domain and was important in determining the price that the employing company could afford to quote to its clients. Knowledge of such information would be valuable to a competitor in calculating how to undercut the ex-employer in its dealings with clients and insurers.
Similarly, knowledge of the firm’s forward financial planning was part of the claimant’s job and this information, if passed on to a competitor, would be detrimental to the firm’s interests. In the judge’s view, details of the firm’s budget overviews and business plans were precisely the type of confidential information that, in a highly competitive area of the insurance industry, was likely to fall within the category that could properly be protected by an express covenant. If an employee contests the legal validity of such a covenant the onus is therefore on the employer to establish that it is a justifiable covenant.
Terms of the covenant
Secondly, the court will look at the terms of the covenant. In general the enforceable covenants are those which are limited in scope relating to time, geography and class of clients. A danger exists in that over ambitious covenants will not be rewritten by the court so as to render them enforceable. Accordingly if a restraint lasting two years is deemed unreasonable then no order can be obtained suggesting one year.
The enforceability of restrictive covenants depends on the circumstances of each case and the burden is on the employer to show that the period of restraint is reasonable. Perhaps a more of a ‘belt and braces’ approach would be to include a ‘gardening leave’ clause in the contract; such a clause can prevent the employee working during their notice period.
Due to the fallible nature of restrictive covenants it always advisable to seek legal advice when considering restricting exiting employees.
For more information please visit: www.charlesprice.net
