Enforcing a restrictive covenant against a former employee
Post-termination restrictive covenants are a common feature of employment contracts, particularly for senior personnel who could cause serious harm to your commercial interests if they went to work for a competitor, began soliciting business from your customers or attempted to poach members of your staff.
In many cases the enforceability of these provisions is accepted by employees without question, but in some instances restrictions are ignored and disputes arise. In this situation prompt legal advice is essential.
Restrictive covenants can offer a degree of protection, but only if they satisfy the strict legal criteria needed to make them enforceable. Employees are becoming increasingly aware that restrictions that are wider than necessary or which seek to exclude them from an industry or profession, even for a short time, may be susceptible to challenge and are therefore seizing on this to try to avoid having to abide by restrictions previously agreed under their contract of employment.
Finding out where you stand and coming up with a plan of action to protect your business interests is something you should do as soon as you become aware that a potential problem exists.
Criteria for enforceability
To be enforceable, a restrictive covenant must be:
· necessary to protect a legitimate business interest;
· no wider than necessary to achieve that objective; and
· no longer in duration than is needed – which in most cases means a maximum of 12 months for employment-related restrictions, and in many instances significantly less than this.
Whether the qualifying criteria is met will be judged at the time the restriction was agreed, as opposed to the time at which the dispute arises.
A restrictive covenant must also have been formally incorporated into the employee’s contract of employment and not subsequently rendered void, for example as a result of a breach of contract occasioned by the employee’s wrongful dismissal.
Options where a dispute arises
Where an employee raises questions about the enforceability of a restriction, as an employer you have three broad options:
· accept that the restriction is not enforceable and take no further action;
· maintain that the restriction is enforceable and insist on full compliance; or
· acknowledge that there may be a question mark over enforceability and so attempt to reach a compromise to ensure a certain and satisfactory outcome, usually via agreed adjustments to the restrictions.
An employment lawyer can help you decide which option to take, depending on your circumstances and will advise whether any enforcement action that might be appropriate ought to be directed solely at your former employee or also at their new employer for inducing a breach of contract. This might be the case if the new employer capitalizes on any wrongdoing of the employee, for example by using your pricing strategies to secure contracts that would have otherwise been awarded to you.
Resolving by way of undertakings
In nearly every case where enforcement action is contemplated, it will be advisable to try to find a mutually agreeable solution before escalating matters to court. This might be possible through direct negotiation or by the use of an independent mediator. Such agreed variations to covenants usually take the form of contractual undertakings given by the employee.
Resolutions are sometimes based on reducing the scope or duration of restrictions providing these can be scaled back without causing unacceptable harm.
For example, a wide-ranging restriction against your former sales director aimed at preventing the poaching of other sales staff for 12 months following their departure might be scaled back to only apply to certain named team members.
Likewise a non-compete restriction aimed at preventing your former business development manager from working for a competitor anywhere in the UK for a period of 12 months following their departure might be scaled back to only cover competitors based within a certain distance from one of your operating bases.
When court action may be necessary
Court proceedings will usually only be advised where attempts to reach an amicable solution have failed or the severity of the damage being caused to your business is high enough to warrant seeking an injunction to bring an immediate halt to your former employee’s activities or those of a new employer.
Before litigating, you should be confident that the terms of the restriction are enforceable and there is a high prospect of the court agreeing with their assessment.
To bring court proceedings, you will need to issue a claim asking for an order directing your former employee to comply with the restriction going forward and to pay compensation for any losses you have incurred.
To support your claim your solicitor will need to gather evidence to prove:
· that the covenant was necessary;
· it was reasonable in scope and duration;
· your former employee agreed to be bound by it;
· the terms of the restriction have been breached;
· you have suffered loss as a result; and
· you will continue to suffer going forward if non-compliance continues.
Where an injunction is being considered you will need to show:
· the harm you are suffering cannot be compensated adequately by an award of money alone; and
· the damage that will be caused to you if an injunction is not granted will be worse than the damage caused to your former employee if an injunction is granted when it ought not to have been.
Deciding whether to apply for an injunction requires careful consideration. Should one of your standard covenants be found to be unenforceable, this can weaken your protection vis a vis other staff. It can also result in you having to pay the other parties legal fees which can be very considerable.
If you need help to assess the enforceability of a restrictive covenant, please contact us.