Restrictive Covenants

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Restrictive Covenants

On September 11, 2015, Posted by , In Blog, By , With No Comments

Frequently we see employment contracts with long restrictive covenants that are very general about not working for “competitors” or approaching clients with either no geographic region or specifying the whole country. Typically courts view this kind of generalisation as a restricting the individual’s ability to earn a living, a “restriction of trade” and therefore it is often near impossible to enforce.

Most frequently restrictive clauses fall down because they are too long, too general or the person concerned is too junior and cannot be shown to present a threat.

The enforcement options for an employer are generally an injunction- to prevent the individual from working against them or a claim for damages. These are notoriously difficult to prove because:

In order to gain an injunction you need to be able to show the individual is in breach of contract and the contract needs to been seen to be fair and not restricting their ability to earn a living. To achieve this the restriction needs to be very tightly written so that it specifies, i.e. names, a relatively small number of specific competitors the employee is prevented from working for or customers they should not contact.

Trying to prevent an individual’s new employers from having contact with your customers or claiming damages where they gain business with them is much more difficult. In the absence of the individual directly approaching prohibited clients you would have to be able to prove that the new employer did not have a pre-existing relationship with the client; which is probably near impossible if they are competing in that market. Further should the new employer gain business you would have to prove that it is a direct result of the individual moving from your company to theirs.

Its also worth bearing in mind that customers are often less than enthusiastic to get involved in providing evidence; particularly if they think they are better off with the new company.

Generally courts view a maximum of 6 months as enforceable and even this needs to be linked to the persons seniority within a business and the potential damage that they can do. Realistically the only sure-fire way of preventing an ex-employee of working for a competitor for a period of time is to extend the notice period and keep them on garden leave; of course this could involve considerable expense and so a judgement would have to be made regarding the potential for loss of business versus the cost.

Overriding this however is that the idea of setting contractual boundaries is a bit hypocritical when many employers expect sales people to bring business with them, then magically believe they can restrict this business going elsewhere by getting the person to sign a contract.

If they expect someone to bring business with them they should also expect them to take it with them when they leave. If they don’t expect this but hire on the basis of someone building business whilst in their employ, it is reasonable to have a clause in  place, making sure that it ties in with the job spec- i.e what the person will be expected to do and what they will have exposure to and that it is very specific. There are instances where companies list competitors whom the employee cannot work for  for a 6 month period and whilst this does take a considerable amount of time and admin in keeping up to date, it does ensure it has a better chance of enforcement.

Perhaps a better approach is based around the relationships between the employer and its customers. If a sales person is doing a good job they are selling the company and its products and services so perhaps the starting point to damage limitation is ensuring the company is doing a good job for the clients, not selling on price and wherever possible has a defined, including term, contractual relationship with customers.

Increasingly sales people view themselves as professional representatives of the organisation they work for as opposed to “jobbing brokers” that takes his customers with him. Indeed customers are often sceptical of sales people who are effectively saying “I know I said that company was great but now I’m saying this one is” – particularly if it happens a little too often!

Having restrictive covenants does not deter the majority of sales people from joining a company particularly if the client has not asked for business to be brought, they will simply avoid direct contact with clients until the term of the restriction has passed. They should not, however, be tempted to lie and tell prospective employers they have no restrictions. Restrictions can be worked around, even if it takes some months, and lying could leave you open to dismissal and a potentially a claim for damages based on misrepresentation, should the company be sued.

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