Clare Fowler, Associate at Berry Smith Lawyers, considers the future challenges for businesses if employees decide to leave to work for a competing business or to set up their own in competition.
The last year has seen fundamental changes for most businesses in dealing with the challenges presented by the pandemic and having to make adaptations to normal business practices. Equally, the lives of many employees have changed substantially as a consequence of new working conditions.
This disruption may well lead to future challenges for many businesses if employees decide to leave to work for a competing business, or to set up business in competition themselves, with risks for employees if they act in breach of relevant legal provisions in so doing.
In short, an employer is entitled to protect its legitimate business interests for a reasonable period by imposing express restrictions to which the employee has agreed. These clauses are usually set out and agreed at the commencement of the employment relationship. The scope of the restrictions also needs to be reasonable taking account of the employees’ seniority and connection with customers. The purpose is broadly to give an employer a limited opportunity to protect its business interests.
In addition, an employer can seek to protect its important confidential information by including express restrictions and by taking adequate steps to keep information confidential. Such information may include customer lists, buying records, discounts or business plans.
The challenge of dealing with the repercussions of the pandemic and the need to ensure that many employees could work from home may have (understandably) led to businesses taking their ‘eye off the ball’ in terms of protecting such information, having less visibility on the actions of their employees, and perhaps loosening access to valuable information.
Likewise, some employees may feel emboldened to set up their own business, using the contacts and information they have gained to set up their business.
It pays for both employers and employees to be aware of the restrictions that apply, to either protect their business or to ascertain whether an employee truly has the freedom to act they think they have.
What are Restrictive Covenants?
Restrictive covenants are contractual provisions that seek to prevent a departing employee from acting in a way that is detrimental to their ex-employer in relation to specified activities for a reasonable period. The most common types of restrictive covenants are non to compete (working for a competitor or setting up business in competition), non-solicitation (poaching existing clients or staff following departure), non-dealing (working with the employer’s existing clients) and general confidentiality provisions (restrictions on making use of an employer’s confidential information following departure).
In absence of express post-contractual provisions in a contract / settlement agreement there is limited action that can be taken by an employer as terms implied into contracts by law usually end on termination of the employment, save for an implied duty of confidentiality which survives, although this is narrower to protect trade secrets of an employer only. For an employer it is therefore important to ensure that a contract includes express provisions to protect a business’ interest following the departure of an employee.
If an employee intends to set up their own business or to leave for a competition, they should be fully aware of the restrictions that apply to them, and the risk that they run in breaching those provisions. Often employees act in ignorance or take steps that clearly infringe their restrictions. If in doubt, employees should seek advice at an early stage as to the preparatory steps that they are entitled to take, or whether restrictions are likely to be enforceable against them.
What can an employer do if an ex-employee has breached post-contractual restrictive covenants?
A breach of restrictions by an ex-employee can potentially have a significant and harmful impact on a business, and therefore it is important to seek advice quickly in order to try and limit the impact on the business, and potential loss suffered, as soon as possible. Delay in taking action can limit or even remove options for enforcing restrictions.
It is often the case that once a business becomes aware of the breach by the ex-employee damage has already occurred. Court action may be taken, if necessary, to prevent further harm and to protect the legitimate interests of the business.
We often deal with cases where there are concerns that an ex-employee may have breached restrictive covenants. The key questions are to consider the enforceability of the covenants and the known activities of the ex-employee and to consider what action can be taken.
In cases where the harm to the business does not yet justify court proceedings, or where it appears possible to enter into a solution with the ex-employee with assurances as to future conduct, undertakings are often sought from the ex-employee in order to ensure compliance with the restrictions, an acknowledgment of the action taken by them and that they will not engage in any further conduct in breach of the restrictions.
In the most serious of cases or where it has not been possible to reach an amicable agreement, court action can be pursued by way of an injunction to enforce the restrictive covenant and prevent the ex-employee taking action in breach of the covenant.
In some cases, an injunction may not be sought but a damages claim pursued in cases where the breach has already occurred and the business can prove it has, or will, suffer a loss as a result of the ex-employee’s actions.
The critical issue for businesses to consider at present is whether they have taken sufficient steps to protect their business which can make future action easier, and for employees that they know the restrictions that apply to them and act within the terms of effective restrictions.
If you require assistance in enforcing post-contractual restrictive covenants or have any queries in relation to the above issues, please do not hesitate to contact us at firstname.lastname@example.org or 02920 345511 and speak to our Commercial Dispute team.