Using restrictive covenants in employee contracts

Seeing one of your former employees set up a business in direct competition to yours can be a frustrating experience and one that is damaging to your interests.

If your business isn’t protected by adequate restrictive covenants, it can be disconcerting when that former employee begins approaching your clients with phone calls and e-mails, schmoozing them at networking events, even trying to entice your staff members to join their new venture.

All businesses can protect their legitimate business interests by using employment contracts to bar key employees from dealing with or soliciting work from customers and suppliers for a period of time.

Drafting restrictions on a bespoke basis

When recruiting key members of staff who will soon have a close working relationship with your customers and suppliers, it is crucially important to ensure restrictive covenants are added to their employment contracts. An audit of your existing key employees is also advisable to ensure they too are covered.

However, the mistake many companies make is using wording that is too generic. It is vitally important that such restrictions are drafted on a bespoke basis to avoid the risk of the courts determining they are too broad to be enforceable.

For example, it is unlikely that a wide geographical area will be justified and, as a general rule, a restriction for more than 6-12 months will also be difficult to defend.

Types of restrictive covenant

The standard types of restrictions which can be used by employers are:

• Non-competition covenants – restrictions on the former employee working in similar employment for a competitor;
• Non-solicitation covenants – which prevent poaching of clients, customers or suppliers of the former employer;
• Non-dealing covenants – which prevent a former employee from dealing with former clients, customers or suppliers, regardless of which party approached the other;
• Non-poaching covenants – which prevent an employee poaching former colleague.

By taking this cost-effective action, a business will gain a set period when it can focus on strengthening relationships with customers or suppliers.

Not only will restrictive covenants give some protection against employees who go on to start a direct competitor, it can also make it more problematic for existing rivals to poach employees who have an intricate knowledge of your business systems and processes.

For more information on restrictive covenants, or any other employment law matters, please contact our Employment team on 01772 258321.