Weekly dilemma: Post-termination restrictions

I’ve just finished interviewing for a senior sales position in my technology company, but if the successful applicant doesn’t work out, I don’t want him stealing my customers or competing with my business. What sort of provisions can I put in the contract, and can I do the same for all my other employees?

The traditional test of the enforceability of a restrictive covenant is that it should be no wider than the minimum reasonably required to protect your legitimate business interests. That does not cover the stamping out of competition, however tempting – it simply protects against the unfair use of confidential information or client or staff contacts and influence gained on your time and at your expense. The starting point for the drafting of any restrictive covenant is, therefore, to determine the risk to the business posed by the employee should he depart. Does his position really grant him an iron grip on your clients or a Pied Piper-like attraction for your staff, or is that just what he tells you at pay review time?

The question is an issue both of role and seniority: the more senior and outward-facing he is, the greater your employee’s possible degree of influence over your staff and clients, so the longer any non-solicitation provision could last. He will obviously invest a considerable quantity of his time (and your money) in building up client relationships, so a suitable non-solicitation clause should certainly be enforceable. To determine its length, you will need to look at the regularity and nature of his contact with his clients – if he sees them only periodically, then a longer period of restraint may be appropriate before they are effectively weaned away from him.

On the other hand, if your clients need your goods and services on a very regular basis, it would not take very long before any replacement you tried to insert into the relationship had either succeeded or demonstrably failed and your restraint would have to reflect that. Remember that there are no points for a near miss here, so it is far better to have a restraint which is narrower than you would ideally like but appears enforceable, than one which is clearly too wide and can safely be laughed at by both your employee and his new employer. Don’t just use the same template covenant as for the finance manager and the chap who empties the bins.

Sometimes you see wording in contracts to the effect that if the court believes the covenant to be too wide, it should redraft it so as to make it enforceable. The courts do have a little-used power to “blue-pencil” (ie delete) parts they consider too wide, but they cannot otherwise amend them. This wording will therefore not save a restrictive covenant which is too wide. It is best to have the employee’s line management make the final call on the length and breadth of the restrictions required to protect the business – often this task is dropped on HR without their having the operational or technical knowledge to judge that risk adequately. Putting line management in the cross-hairs at the outset of the contract will make them focus on the question now rather than rely on the traditional route of blaming you later.

By far your most effective weapon against your departing employee is actually not a restrictive covenant at all but a garden leave clause coupled with a reasonable notice period. By that combination you can keep your employee out of the competition for the duration of his notice period and (because he remains employed by you over that time) subject to much stricter obligations to you of good faith and exclusive service than can be imposed after his employment ends.

Remember at the same time that however tight and brilliant your post-employment restraint drafting, it will be invalidated at a stroke if you are guilty of a breach of your employee’s contract, whether in constructively dismissing him or paying him in lieu of notice (whoever gave it) without the contractual right to do so.

David Whincup, partner, Squire Sanders Hammonds, London

Key drafting points for restrictive covenants

  • Nothing lasting more than one year will work, but that does not mean that one year will necessarily work. Aim for the shortest period you can bear – the risk a departing employee poses in reality is almost always less than in theory.
  • Limit the restraint to clients and targets actually dealt with or pitched to in the last six to twelve months of the employment.
  • Limit the prohibition on his soliciting your clients to the sort of goods and services he sold on your behalf, and to the territories in which he did so.

XpertHR FAQs on restrictive covenants

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