Many of you will have come across restrictive covenants, whether as an employer or an employee. These are provisions, usually contained in the contract of employment, which restrict the activities of (generally senior) employees or directors after their employment has come to an end. Commonly, the employer will be seeking to restrict the departing employee from setting up in competition, working for a competitor, soliciting customers and enticing away other employees of the company.
Generally speaking, such restrictions are unlawful. However, they will be upheld by the Courts where they are a proportionate way to protect the legitimate business interests of the employer and therefore employees should not assume that the restrictions in their contracts will be unenforceable.
A number of cases have been decided recently concerning the enforceability of restrictive covenants. These cases have demonstrated both the importance of effective drafting and also that where such drafting is used, covenants which may seem particularly restrictive, may well be held to be enforceable and costly for those who act in breach.
In Safetynet Security Ltd v Coppage and another, a non-solicitation covenant which prevented a director from soliciting customers for a six-month period following termination of his employment was held to be enforceable despite the fact that it covered any individual or organisation who had been a customer of the business during his employment. The basis for this finding was that any lesser restriction would not have provided the company with sufficient protection given the director’s role in the organisation and that he was the key face of the business.
It was also held that the covenant still applied, despite the fact that the director attempted to disguise his involvement in a new company by arranging for another individual to incorporate the new business.
When drafting these types of covenants it is important to take account of whether the client/customer base is confidential and, if so, for how long that would be the case and also if/when the information to be protected will be likely to go out of date. The job title and client exposure enjoyed by the individual employee should also be taken into consideration.
It was also highlighted in the Safetynet case that a direct or targeted approach to customers is necessary for there to be a breach of a non-solicitation covenant and a general notification of availability or information being provided about alternative services on offer would not be sufficient to breach a non-solicitation clause. If it is considered necessary to include this type of additional protection, employers should consider whether ‘no dealing’ provisions should also be inserted in the covenants. Non-dealing clauses prevent individuals accepting orders or providing services to customers even where the customer has “followed” the individual and there has been no solicitation as such.
The courts reached a different conclusion, however, in CEF Holdings Ltd v Mundey. In this case, the non-solicitation covenant (i.e. a provision preventing departing employees to entice other employees away from the employer) which covered any employee of the company was held to be unenforceable. The covenant in this case affected around 3,000 employees who may or may not have worked with the departing employee, therefore, it could not be said that the company had a legitimate interest in protecting all of the individuals concerned.
Bear in mind when drafting covenants that a court will not amend a covenant that is too wide to protect what would otherwise be a legitimate interest, though it is possible to include a clause to say that each covenant should be treated as separate and distinct so that if one does not apply, the others will still be enforceable.
A further point to note, which arose in PAT Systems v Neilly, is that the appropriate point in time for determining the enforceability of restrictive covenants is the time that they were entered into, not the point of termination. In this case, the 12 month non-compete covenant was held to be unenforceable as it was entered into whilst the employee held a junior post and would have gone beyond what was necessary at that time, despite the fact that at the point of termination of his employment he held a much more senior role. It was held that a later promotion alone could not render the previously drafted covenant enforceable.
The above cases have demonstrated both that breaches of restrictive covenants should not be taken lightly (particularly given that the damages awarded in the Safetynet case were around £50,000). Departing employees should be mindful of this, as should new employers who may want to take advantage of a new employee’s contacts and knowledge. For employers drafting new covenants, particularly for senior employee contracts and client facing roles, it is fundamentally important that careful thinking and drafting should be behind the covenants put in place. It is certainly not the case that by simply increasing the restricted period or geographical boundaries, the protection for employers will be enhanced. In many cases, this will in fact render the restrictions unenforceable for being too wide and outwith the reasonable and legitimate business interest which they must protect.
The key points to remember when drafting covenants: