Restrictive Covenants in Employment Contracts
It is a widely held view that restrictive covenants in employment contracts are unenforceable and are a waste of time.
This view is completely wrong!
A well drawn restrictive covenant, tailored to the individual concerned will be valid and enforceable and is a most valuable asset for any business which has any secrets or customers that it wishes to keep.
Why bother with a restrictive covenant at all?
There are two reasons why it is thoroughly worthwhile having restrictive covenants. These are:-
- If an employee leaves you and acts in breach of the covenant you can go for an immediate injunction stopping both him and the company that he has gone to from acting in breach of the covenant.
- And arguably the more important reason; the existence of a restrictive covenant acts "pour discourager les autres"
In other words if your company has an employee on a well drawn restrictive covenant there is a good chance that he will not, firstly, even look for another job with a competitor but, even if he does, it is likely that that competitor will ask to see his contract. If the competitor (probably through his solicitors) takes the view that the restrictive covenant on your employee is valid and binding they will not even offer him a job.
Thus the existence of the restrictive covenant is likely to discourage (a) your employees from leaving you in the first place and (b) a competitor offering them a job when they see what the contract says.
What secrets do you want to protect?
Restrictive covenants do not just protect secret formulae. They protect all confidential information that is genuinely confidential to the company. In other words:- a list of your customers; or your price and discount structure; or your management information etc. etc.
What is not protected?
You cannot stop an employee from using his "skill and knowledge" even if he acquired that skill and knowledge whilst working for you. This means that, for example, if you employed a carpenter who had learnt a new method of, say, turning a chair leg then this would become part of his skill and knowledge and he would be free to make use of it for a competitor.
What types of restrictions can be imposed?
There are a number of types of restrictions which you can impose upon an employee. There are restrictions on area, restrictions on time and restrictions on customers.
In simple terms in appropriate circumstances you can restrict an employee from operating within a given radius for a given length of time or from seeing specific or general customers.
It is a matter of judgement as to precisely which type of restriction is appropriate.
In general the tighter the restriction the more chance it is or being enforced. So if your employee operates within say a 20 mile radius of your premises if you restrict him to say 15 miles it is likely that the restriction will be enforced. If you restrict him for say 25 miles it is likely that the restriction will be totally struck out and you will have no restriction on him at all. The same applies to time restrictions.
Perhaps the best (and easiest to enforce) are those restrictions which stop your employee touting for the business of your existing customers. Courts will readily enforce such covenants as quite obviously your own customers are, to all intents and purposes, an asset of the business and it is not right that an employee should effectively steal away those assets by using the knowledge which he gained whilst working for you for his own or someone else's benefit.
Why can't one use standard restrictions?
There is no such thing as an enforceable blanket restriction. It is easiest to illustrate this point by giving two examples of famous cases. The first case involved a solicitor who was working for a firm in High Holborn in London. His restriction stopped him from working for a competitor within a radius of 400 yards of his office. The second case concerns a salesman working for a heavy artillery manufacturing company whose area of work and whose restriction was the northern hemisphere of the world.
You may be surprised to find that the restriction on the salesman was upheld and the restriction on the solicitor was held to be too wide.
The reasoning is impeccable. The Court had to decide what damage would be caused to the employer's business by the employee operating within these restricted areas. There are hundreds of firms of solicitors within a radius of 400 yards of High Holborn and the Court took the view that there would be no damage caused to the business if this solicitor were to operate from say 300 yards away.
Conversely as very few items of heavy artillery are sold and as the salesman's area of business was in fact the northern hemisphere then if he was not stopped from operating within that territory considerable harm would be caused to the gun manufacturing company.
However this does illustrate quite neatly the importance of tailoring the restriction to the particular circumstances.
A well drawn restrictive covenant is an eminently sensible and commercial thing for a company to have. The obvious benefit of being able to enforce the covenant by injunction proceedings in the Court is in fact the less important reason. The real reason for having such a covenant is that it really does discourage employees from leaving your employ in the first place. No intelligent competitor is likely to run the risk of proceedings being taken against it not only for an injunction but also for damages.
The moral is to consider carefully which of your employees could seriously hurt your business if they joined a competitor and then to find a way to get them signed up on a restrictive covenant. It is however absolutely vital that the covenant is tailor made by expert commercial solicitors or you will be wasting money.
If you require further information on this topic please contact Keith Turner on 01604 622101 or email email@example.com.