The loss of a key staff member can have a significant effect on a business. Richard Woodman gives guidance on the best ways to protect information and relationships in that scenario.
The departure of a key member of staff to a competitor can now make headlines outside the specialist property press. Take, for example, the poaching of “super agent” James Beckham by CBRE in September last year, as reported by the Daily Mail.
Negative publicity aside, the departure of a key member of a team can have a detrimental impact on a business. What steps can a business take to protect information and relationships? When do such steps fall into making it impossible for someone to earn a living, and does this matter? What about restraint of trade?
Since the 18th century, English common law has frowned on contracts that prevent an individual from earning their living and the starting point is that provisions “in restraint of trade” are in principle void and unenforceable. However, post-termination restrictions can be upheld by the courts if they are “no wider or more onerous than strictly necessary to protect a legitimate business interest”.
Post-termination restrictive covenants need to balance these conflicting perspectives; and covenants that may be fair in one situation will be unfair in others – because, in practice, it is for the employer to show that the extent of any covenant is necessary and reasonable in the particular case.
The business interests an employer can look to protect include its trade connections with customers or suppliers, secret or confidential information, and maintaining the stability of the workforce.
If a restrictive covenant is to be enforceable after termination, it must be reasonable in three main components:
- restricted activities;
- geographical area; and
- duration.
Restricted activities
The restraint must be limited to the employer’s particular business activity, not general competition. For example, in the case of an estate agency dealing only with residential property, a general restriction that includes acting as a commercial agent is likely to fail. Indeed, it is probably necessary to limit the restriction to the specific area of the employer’s business with which the employee has actually been concerned, and not other parts of the business with which he had no dealing. For this reason, it may be desirable to indicate in the contract the scope of the employee’s responsibilities.
Duration
The longer the duration, the less likely a covenant is to be enforceable. It may be possible to trade time for geographical limits. The time must never exceed what is necessary to protect the employer. Thus, in some cases of hi-tech industries, change is so rapid that only a short period of protection may be necessary.
Broadly, the time should be what is necessary for the employer to re-establish links with his customers before it is appropriate to let the ex-employee compete on a level playing-field. The more senior the employee, the more time may be necessary.
Geography
Territorial scope is important mainly when considering a pure “non-compete” clause. If a business operates only in a limited area, a restriction beyond that area is usually not acceptable. Moreover, where the area is apparently small – for example, the City of London – to restrict an agent from working anywhere within that area might amount in practice to a more or less total ban on working and so is potentially unenforceable.
Types of post-termination covenants
There are also a number of post-termination covenants to consider.
Non-compete. Clauses designed to prevent an employee working for a competitor post-termination give the greatest protection but are typically the hardest to enforce. They should not be relied on as the only option. The courts have, however, recognised that there are circumstances where only a non-compete clause can give reasonable protection.
Non-solicitation of customers. This is the most readily upheld (subject to reasonableness) but it should be borne in mind that solicitation is frequently difficult to prove.
Non-dealing with customers. For most employers, a provision restricting the ex-employee from business dealings with former customers offers the best combination of effectiveness and enforceability. It is simpler to prove that someone is working for a customer than that they actively solicited the instruction.
Non-solicitation of employees or suppliers. The departure of a key employee can also make an employer vulnerable to team members looking to leave and to problems with suppliers. The courts will uphold reasonable restrictions on the solicitation of staff or suppliers.
Other factors to consider
When is reasonableness assessed? Importantly, the reasonableness of a restrictive covenant is assessed at the time the contract was signed. If a clause was unreasonable – for example, because it is too onerous given the employee’s junior status – then it cannot become reasonable because over time the employee has gained seniority. For this reason, it is vital to keep restrictive covenants under review and update them as employees change roles or gain promotions.
Is a covenant usual? If the covenant is customary in the employer’s area of business, this may help to show that it is reasonably necessary.
Period of the employee’s notice. The period of notice necessary to terminate the contract may be a factor in determining the reasonableness of the covenant. A long notice period could lead a judge to conclude that a long post-termination restraint period is unreasonable. Certainly, a well-drafted contract will “give credit” against the period of the restrictive covenants for any time served on garden leave.
Consideration for the covenants. An employer seeking to enforce a restrictive covenant must be able to show that he gave the employee some value, legally called “consideration”, for it. Where covenants are included as part of the offer of employment there is typically no difficulty. The position is more contentious where covenants are introduced after employment has begun.
Richard Woodman is a partner in the employment team at Royds Withy King
