Restrictive covenants have near mythical status in employment law circles. Lots of employment contracts contain them, but they are so often poorly worded as to be near useless when it comes to an employer enforcing them against an ex-employee or their new employer. And even if they are worded well, very few employers actually take enforcement action on them, a habit which gets noticed by employees and acted upon.
One common problem is that the restrictions in the employment contract have often been copied from a previous contract, perhaps written by a lawyer decades ago and not recently reviewed. They are simply way out of date, often because they are too vague and loosely worded to be valid nowadays.
Another problem is that the restrictions often haven’t been tailored for the particular role. They may have been written very well, perhaps quite recently, but they might be too long, too harsh or simply not sufficiently relevant for the employee’s role as it stands today. As a person’s role and career evolves in a business, restrictive covenants that were relevant, reasonable and enforceable when their last contract was put together might quickly become out-of-date, particularly if they have since been promoted.
Even if the restrictions are well-worded and still relevant enough to the employee’s role to be enforceable in court, the other major issue is employers’ reluctance to actually enforce them.
A similar scenario tends to pan out. A valuable and well-connected employee leaves, with the intention of either taking customers or joining a competitor. The ex-employer panics, writes a stiff letter, rattles their sabre and then, well, nothing happens. The ex-employee then often ignores the stiff letter and carries on doing what they always intended to do. Employees are becoming much more savvy and bold, and usually now start from the position that either “these restrictions are probably not enforceable” or “my company won’t actually do anything about it – they never do”.
This lack of legal action by the ex-employer devalues or completely destroys the deterrent factor from the restrictive covenants, creating a culture within the business where employees feel pretty confident in leaving and taking valuable customers (and perhaps colleagues) with them with impunity. The more this goes on, the more it is seen as acceptable and the more reluctant the ex-employer is to take a stand when the next employee leaves.
Restrictive covenants are designed to protect the legitimate commercial interests of a business in reasonable and limited ways. It can be such a shame to see them routinely ignored and flouted. In some cases it’s as if the business has left its valuable IP, contacts and expensively trained staff outside the front door in a cardboard box with a sign saying “help yourself”.
Worded correctly, and tailored properly for the specific role that the employee is in at the point when they decide to leave, restrictive covenants can actually be very enforceable and a useful tool to ‘take’ the employee out of the market-place for a limited period of time. This gives the employer some valuable breathing space and time to ensure that those all important business interests are protected and, importantly, customers are not tempted to jump ship and move their business. The same goes for protecting one of a business’ most valuable asset: its workforce. Again, a key employee leaving can cause ripples amongst existing staff. If the leaver is prevented from poaching other employees, even for a limited period, it again gives the employer that valuable time to calm the waters.
A recent case, Bartholomews Agri Food v Thornton, is yet another reminder of how easy it is still to get it wrong with restrictive covenants, in more than one way. In that case Mr Thornton was a senior agronomist with the Company and gave notice at the end of 2015 that he was going to work for a competitor. BAF sought to rely on restrictive covenants that had actually been in Mr Thornton’s original contract when he joined BAF in 1997 as a trainee. They were probably patting themselves on the back for having been so organised.
Oh dear. The court held that the covenants would not have been enforceable in 1997 because at that time, Mr Thornton had no customer base. Even though he did by the time BAF wanted to enforce them in 2015, it didn’t make a jot of difference. BAF should only have introduced the covenants when Mr Thornton had been promoted to a senior rank. A restriction that was unenforceable when it was first put into an employee’s contract doesn’t magically become reasonable and enforceable in later years, once the employee is in of a key position that is worthy of such a restriction. To put it another way, if a restriction is inappropriate when it’s introduced into the contractual relationship, it dies a death at that point and cannot be brought back to life at a later date.
To further drive the nail into the restrictive covenant coffin, the court went on to find that, in any event, Mr Thornton’s covenants were drafted too widely to be unreasonable, even after his 20-year career. They sought to prevent him from dealing with any BAF customer regardless of whether he had had any prior dealings with the customer. Given that he had worked with customers who represented only 2% of the company’s overall turnover, it would have been manifestly unfair to prevent him from working with customers representing the other 98% of the employer’s existing customer base.
This case is a really useful reminder that ‘one size doesn’t fit all’ when it comes to restrictive covenants. They should only be utilised for key employees with either important customer and/or supplier connections, where they have access to lots of confidential information and/or they head up a very important team who might be tempted to ‘bolt with the boss’. Inserting them into everyone’s contract is a scattergun approach which can easily create problems later.
The Government has just announced that it is launching a ‘call for evidence’ on restrictive covenants and is asking businesses and entrepreneurs to give their views on whether clauses that prevent an individual from competing against their former employer are stifling opportunities to innovate and grow.
They have asked for evidence of the use of both classic ‘non-compete’ restriction but also ‘non-solicitation’ and ‘non-poaching of colleagues’ covenants too. We will be watching this area closely and will report back later in the year on any developments.
In the meantime, it may well be time you took a look at the validity and deterrence factors of your current restrictive covenants – and I’d be very happy to help you with that.
There are also lots of other creative ways to ensure that your employees are kept incentivised to stay with you and not steal your clients, and which don’t involve relying on unreliable restrictive covenants. If you would like discuss your current arrangements, do please contact me for a chat.