Employers typically devote most of their efforts to come up with new, effectual programmes enabling these to engage and retain their employees and attract talented people from the exogenous environment. It can thus occur that some individuals might decide at some point to leave their organization lured by the apparently most attractive opportunities offered by other organizations.
Under such circumstances, employers are habitually everything but ecstatic. The loss of experienced, knowledgeable professionals, especially of those who have gained a relevant degree of expertise in their professional domain over the years, is in fact highly likely to make a considerable negative impact on an organization. Yet, depending on the activities performed by individuals, their knowledge and use of business-related confidential information, once these have left the organization, usually represent a serious reason for employers concern.
The risk associated
with these occurrences is invariably potentially remarkable, but whether the
individuals leaving the organization should work, for instance, in the sales department
such occurrences might produce even more hampering and detrimental effects by
reason of these employees having full access to the customers’ database and an in-depth
knowledge of the business sales strategy.
Employee knowledge of
the organization’s technology, strategy and working procedures may indeed invariably
cause high degrees of concern for businesses experiencing unexpected departures
of their key staff. These individuals might in fact effectively help both the direct
and indirect employer’s competitors to expand and strengthen their presence in the
market.
In order for
organizations to reduce and mitigate the effects produced by such undesirable occurrences
these can include in their contracts of employment specific covenants aiming at
regulating the post termination behaviour and activity of their former
employees. The ultimate aim is of preventing individuals who leave a business from
setting and running a company or joining an existing business availing themselves
of the information gathered during their previous working relationship, to the
detriment of the former employer. In some instances, covenants can indeed help employers
to buy time to lessen the effects usually produced by such circumstances. Things,
nonetheless, are not as straightforward as they can apparently seem to be.
Types of restrictive covenants
Employers
habitually introduce in their contracts of employment one of the following main
types of covenants:
1. Non-compete covenant – aims at preventing individuals
who have left their employers directly competing or working with the former
employer’s competitors. Usually such a clause identifies a specific
non-competition temporal limit (for instance, six months from termination) and
a geographical area delimitation (for example, within fifty miles of the former
employer’s premises, headquarters or previous workplace). With particular reference
to this aspect, Holt and Bazen (2008) stress that covenants increasingly tend
to refer to the “employer’s market(s)”;
2. Non-dealing/non-solicitation covenant – whose objective
is to prevent individuals from working with the previous employer’s customers and
suppliers by sending or accepting orders for goods and services, more often
than not for a predetermined post-termination period of time;
3. Non-poaching – this clause is aimed at averting that individuals
who have left an organization may persuade former colleagues to come and work for
their new employer, also in this case for any given period of time subsequent
to termination;
4. Non-use of confidential information – this clause is
introduced to prevent employees unveiling or using any confidential information
(such as technology, strategy, etc.) gained during their previous working
relationship.
The employer’s outlook
Employers are particularly and comprehensibly
sensitive to the loss of key employees and to the risk associated with this type
of circumstances. When trying to protect their business, firms should strive to
clearly identify and focus on the main interest they want to protect and act in
a way which may be objectively considered reasonably necessary to attain that
objective. The expression “reasonably necessary” more specifically relates to
the duration, scope, nature and effects of the limitation (Andela and Pitt,
2008). The risk would otherwise be emptying and voiding the content of the
clause and achieving in practice no objective at all.
In Thomas v Farr
plc and Hanover Park Commercial Ltd (2007), for instance, the managing director
had accepted an employment offer from his former employer’s main competitor and
sustained that the covenants included in his contract represented an
unreasonable limitation of trade and that these were as such unenforceable
(Skeaping, 2010). The employer was able to show the Court that the MD had
actually access to confidential, strategic information enabling this to quickly
design and develop an effective strategy for the new employer, which could have
seriously hampered the activity of his business. The High Court and the Court
of Appeal respectively held and upheld that the restrictive covenant included
in his contract (non-competition clause for twelve months following
termination) was reasonable (Skeaping, 2010). Things would have arguably gone differently
whether the non-competition clause would have been wider and not limited to the
specific sector in which the former employee was actually operating.
As a general rule,
a limitation concerning the solicitation of trade with the customers of the previous
employer with whom the employee was regularly in contact is more likely to be
enforceable than a wider restriction concerning all of the customers of the
previous employers, including those with whom the employee had actually never been
in contact (Roydens, 2009).
The employee’s outlook
Individuals who
have gained a relevant degree of expertise and experience in an industry sector
will find it virtually impossible and inappropriate having to change industry
and putting aside the expertise these have gained over the years. Yet, this would
clearly have a remarkable impact on their capability to find a new job and on
the worthiness of the income these would be able to earn. It is thus very
unlikely that judges may enforce covenants preventing any form of competition
with the former employer or clauses vaguely formulated (Roydens, 2009).
Garden leave
Garden leave is a
clause enabling employers to require the individuals who have decided to leave
the organization to spend all or part of their notice period at home. Since during
this period the contract of employment is still effective, employees continue
to regularly receive their full pay and contractual benefits (Net Lawmen, 2011).
In order to maximise the effects of the contractual limitations this clause is
usually associated with restrictive covenants (Tyler and Mecrate-Butcher,
2011).
The combination of
garden leave and restrictive covenants may enable employers to attain several remarkably
significant objectives. Preventing the employee to have access to the organizational
premises enables the business to keep this unaware of the foreseen change of
strategy and of the other types of plans the business might decide to make.
Yet, during this period the employee will not be in a position to start working
for any other employers, whereas the current employer can appoint his/her substitute
and give this the time to establish in the new position (Tyler and
Mecrate-Butcher, 2011). Last but not really least, the enforcement of the garden
leave clause also prevents individuals from resigning and claiming constructive
dismissal during the period of its valid (Net Lawman, 2011).
Severability
The Courts are lately
adopting a different approach to restrictive covenants, mostly focused on the
identification of the clause purpose, rather than on its literal interpretation
(Andela and Pitt, 2008). In Beckett Investment Management Group Ltd & Ors v
Hall & Ors (2007), for instance, to make its decision the Court of Appeal
had regard to the business realities. The Court also considered the clients of
the employer subsidiaries, albeit these had not been mentioned in the clause. This
new trend clearly emerges also from TFS Derivatives Ltd v Morgan (2004) where the
Judge held that the first thing to look at when considering a restrictive
covenant is what it means when it is properly interpreted.
Courts will
obviously never re-write a limitation clause that they consider inappropriate
or unenforceable, but a Court may “sever” part of the clause in order to make
it appropriate and as such enforceable. This is actually what occurred in the
case TFS Derivatives Ltd v Morgan (2004). In the contract of employment the
original formulation contained the expression: “any business which is either
competitive with or similar to”; the High Court held that removing the words
“or similar to” would have created an enforceable covenant (Andela and Pitt,
2008) so that it considered the covenant enforceable to this extent.
As suggested by
Tucker (2008), notwithstanding, “the doctrine of severance may ride to the
rescue of covenant that is defective in one or more respects except that with
respect to time.” A limitation unreasonably set in twelve months will not be
severed to the, for example, reasonable period of six months by the Court. In
such a case the clause would be hence considered void and unenforceable.
Employers should thus
avert being over-reliant on severability when drawing up a contract of
employment. In general, this is deemed acceptable when the clause is composed
of a combination of several covenants. This is indeed the only case in which
the partial enforcement of the overall clause is possible in that it will not
require neither to be re-written nor to be altered in any way to be, albeit
partially, enforced (Tucker, 2008). The exercise, nonetheless, may prove to be exceedingly
risky and particularly difficult to perform in practice.
Reasonableness
As a general rule, the Courts consider void a
contractual term aiming at restricting an individual trading activity after
termination unless an employer can provide evidence that this has a legitimate business
interest to protect and that this protection is reasonable having regard to the
parties and the public interest (Net Lawman, 2011).
The enforceability
of restrictive covenants sorely depends upon the circumstances so that this
definitely represents a case in which the one size does not fit all. Each
clause must be differently considered according to the business needs. The
Courts habitually permit employers to protect two specific rights:
- Trade connections
(with suppliers or customers) or more broadly goodwill;
- Trade secrets and
other confidential information (Net Lawman, 2011).
In general, there
are some specific points which employers should carefully consider when assessing
reasonableness, amongst these extra care should be taken with:
- The level of seniority of the employee concerned
Employers can
impose more onerous limitations to senior employees; otherwise it may prove to be
sorely hard to show that limitations go no further than necessary;
- The position covered by the individual
The reference is
here to the role covered by the employee in the new organization, in order to
find out whether any link actually exists between the previous and the current
role;
- The nature and extension of the business
This is extremely
important to determine the reasonableness of the geographical limitation
included in the clause;
- The duration set for the covenant
Excluding the case
of garden leave and eventually considering the length of its duration, individuals
will have no source of income during the enforceability of the limitation (Holt
and Bazen, 2008);
- The real contacts, relationships and level of
involvement
It is in fact pointless
to prevent an individual getting in contact with suppliers or customers with
whom he has never been in contact during his working relationship with the
covenantee.
Conclusions
For employers it is definitely most appropriate
to draw up contracts containing a few, well-identified, reasonable and as such defendable
limitations, rather than a list of draconian restraints which would even make
no point to enforce.
Before recruiting an
experienced, high calibre individual, especially a sales professional, employers
should care to ask and know what types of clauses, that is to say limitations, are
contained in his/her current contract of employment. Yet, since the individual is
willing to leave his/her previous employer this may do it again; employers are hence
strongly advised to include a restrictive covenant clause in the contract they
are going to agree with the new hire whether his/her position justifies this.
In the event the
former employer should judge that by joining a different organization and
covering a particular role within this the former employee has breached the
restrictive covenant clause included in his previous contract, the first think
the former employer will do is to seek an injunction. Usually, but not necessarily,
the first stage is represented by the application for an interlocutory
injunction. With this application the former employer asks the Court to
immediately suspend the new employment relationship until the case is discussed
(Lynder Myers, 2011).
The Court grants
the injunction whether it is satisfied that the application is actually representative
of a serious issue, that is, whether the Court judges that the claim is neither
vexatious nor frivolous. To this extent the Court takes heed, amongst the other
elements, of whether damages would be a sufficient solution in case of trial
and whether it may prove to be more detrimental granting the injunction, rather
than refusing it.
Employers, provided
that they can produce evidences of that, may also claim to have suffered some
losses for the employee breach of the limitation clause, usually loss of
profits and of trade opportunities. To determine whether and to what extent
these losses can be associated with the employee breach of the covenant, the
Court evaluates the damage based on the opportunities the business has actually
lost. Despite this is everything but a straightforward process, this circumstance
has never represented a good reason for the Court to exonerate individuals (who
this has deemed to have breached the restrictive covenant) to pay damages to
their former employer (Lynder Myers, 2011).
Inasmuch as the
injunction and eventually the court case represent a serious problem for
employers, things do not go any better for employees who, especially in the
event these have actually breached the contract, will have to face the trial and
the expenses associated with this.
As suggested by
Roydens (2009), “restrictive covenants are a bit of a game”, the winners are
likely to be the ones who better know the rule. It could also be added that in
order for employers to enhance their chances to win these should be careful
when writing the limitations. Well-identified, defensible, well-described and
narrowed objectives are most likely to be considered reasonable and then
enforceable by the Courts.
