Employees who have client facing roles or access to valuable confidential information will often be subject to restrictive covenants of one sort or another. These are contractual terms which limit competitive activity for a period of time after the employment ends. Typically these might prohibit the individual from joining a competitor or poaching clients.
If a restrictive covenant is breached the business may decide that it needs to take action. What is the best way to proceed and what are some of the key considerations?
Do not delay
It is vital that employers obtain advice at the earliest possible stage when there is evidence that a restrictive covenant has been or might be breached.
Enforcement proceedings will often involve the Court being asked to grant an injunction to prevent further breaches or curtail any continuing breach.
In some cases, injunctive relief will be the only remedy being sought. One factor which is usually relevant to the granting of an injunction is whether there has been any unreasonable delay in taking enforcement action. It is likely to be more difficult to persuade the Court that an injunction is necessary if there has not been an appropriate sense of urgency in the employer’s response.
Does the restriction protect a legitimate interest?
Legitimate interests include preventing the disclosure of confidential information, preserving relationships with clients and maintaining a stable workforce.
The Court will need to be satisfied that the actions of the employee being sued represent a credible threat to the legitimate interest which the employer is trying to protect. Where, for example, the business is seeking to prevent the disclosure of valuable confidential information, it is important to consider whether the information which the particular employee has been party to could in fact provide another business with a competitive advantage and the extent to which they are likely to remember that information once they leave.
Has the clause been well drafted?
The Courts will not enforce restrictive covenants which are unreasonably wide in scope. Sloppy drafting can have the effect of broadening the impact of a covenant in ways which might not have been intended.
For example, if a client poaching restriction is not limited to the clients the employee had dealings with this might well render it unenforceable. Similarly, a clause which prohibits a member of staff from doing work which is similar to the type of work they did at any time during their employment might be regarded as too wide because it could have the effect of preventing the employee working in an area they had not been involved with for many years.
Usually the first step to take when considering how to respond to a breach is to examine the relevant clause carefully to make sure that these sort of drafting traps have been avoided. If any obvious flaws are identified it might be better to focus on reviewing the contract and getting it right next time, rather than pursuing the departing employee.
Is the time period reasonable?
A restriction which continues for longer than is reasonably necessary will fail the enforceability test. But how long is too long?
In part, this will depend on what the employer is seeking to protect. A restriction which prohibits employment with a competitor might be aimed at preventing the disclosure of confidential information, in which case the time period should not exceed the reasonable “shelf-life” of that information. If it would only be of value to a competitor for six months, a twelve month restriction is unlikely to be enforced.
Where the clause is aimed at preventing clients being poached, a reasonable time period will usually relate to how long it is likely to take a replacement employee to establish good relationships with the clients serviced by the departing employee.
Did the employer breach first?
If there has been a fundamental breach of the employment contract by the employer the employee will be released from any restrictive covenants it contains. This might occur where, for example, an employee has resigned because they have not been paid or because they have been subjected to discriminatory conduct.
There would also be a fundamental breach if the employer dismisses but does not observe its contractual obligations in relation to notice. Many contracts will offer the employer the option of making a payment in lieu of notice (PILON) instead of giving notice. However, if this option is not specified in the contract, dismissing without notice will amount to a fundamental breach (whether or not a PILON is made), releasing the employee from any restrictive covenants unless it can be shown that they were dismissed for gross misconduct.
Can a settlement be reached?
If the business takes action and is successful an important warning signal will be sent out to other employees and the business’s competitors. However, litigation always carries with it a degree of risk and so it is usually worth considering whether a settlement can be reached without having to go to court. If it can, the parties will have certainty and costs are likely to be saved.