Employers that have not updated restrictive covenants in their employment contracts should do so as the jobs market improves, and take into account recent rulings. Darren Hayward, employment lawyer at Nockolds, explains why this is important.
Urban myth has it that restrictive covenants in employment contracts are unenforceable and quite literally not worth the paper they are written on. When this is true, it is often because they have been badly drafted and then not updated in line with case law or the changing reality of the employment relationship.
Recent rulings have shown that the courts are quite prepared to uphold restrictive covenants, in many cases lengthy non-compete and non-dealing clauses, but have underlined the need for covenants to be carefully drafted.
As jobs market liquidity improves and employees who stayed put during the recession re-enter the employment market, employers should review restrictive covenants. Recent years have also seen a boom in entrepreneurship with many former employees starting up their own ventures. Around 550,000 new companies were formed in 2014/15, by far the highest number on record.
Restrictive covenants resources
With staff increasingly leaving to join competitors or start up their own companies, it is more important than it has been in years that fair and enforceable restrictive covenants are included in employment contracts.
Avoid a one-size-fits-all approach when drafting restrictive covenants
One of the most common mistakes that employers make is to insert a standard, one-size-fits-all restrictive covenant into every contract of employment. This is particularly likely in the current climate as employee churn increases and restrictive covenants are copied from existing contracts.
If an employer has incorporated a standard set of covenants into its employment contracts and they are held to be unenforceable against one employee, this may create an unhelpful precedent for the employer in relation to other employees who seek to challenge the covenants, and reduce any deterrent value that the covenants may have otherwise had.
It is therefore important to ensure that covenants are tailored for each grade of employee. While a 12-month non-compete clause, which prevents the employee from working for restricted clients or competitors, might be appropriate for a director-level role, such a clause may not be enforceable against a more junior employee.
The important thing to remember with covenant lengths is that if a court rules that the duration of a covenant is too restrictive, that covenant is wholly void. A court will not substitute a covenant it considers too restrictive in duration for one it considers reasonable.
Review contracts of current staff
This feeds into the need to regularly review and update the restrictive covenants of existing employees. The average length of tenure in a job increased during the recession, and many employees hired as juniors have since been promoted to senior roles. In many cases, their contracts may not contain restrictive covenants at all, or covenants which do not reflect their new seniority.
Regular reviews are good practice and the best time to ask employees to agree to revised covenants is when they are being promoted, at a time when they are likely to be well-disposed to agreeing to new contractual terms.
With staff mobility increasing, employers should consider including a clause that obliges employees to notify senior management immediately of any approach or offer of alternative employment (whether actual or prospective) and of any other maturing business opportunities. This allows consideration to be given to making a counter-offer and guards against potential loss of business resulting from an individual or team leaving by taking action to retain staff or manage clients at an early stage.
Avoid a breach of contract while employees are on notice
Another common mistake is when employers inadvertently breach contract while employees are on notice. It is not widely known but any breach of contract, unless waived by the employee, renders restrictive covenants unenforceable. Breaches of this kind frequently happen when employers place departing staff on garden leave without an express contractual provision allowing them to do so.
Garden leave, when used in conjunction with restrictive covenants, can be a very useful tool to keep departing employees away from clients, confidential information and other staff, but only explicit garden leave provisions in employment contracts provide that option. All too often employers place staff on garden leave or pay them in lieu of notice, without having express provision to do so, later finding that restrictive covenants cannot be enforced.
As a general rule, then, restrictive covenants can and should be enforced, not least because failing to do so can send the wrong message to other employees. The power of restrictive covenants as a deterrent depends upon the willingness of employers to take action against employees and former employees who breach them.
Problems can arise when employers attempt to enforce restrictive covenants that have been poorly drafted or are out of date, and subsequently fail, sending the message to employees that covenants are unenforceable. Properly drafted covenants, however – when used in conjunction with other contractual clauses, such as garden leave, and regularly reviewed – can be a potent weapon to protect legitimate business interests.