Business Law & Compliance
A look at restrictive covenants: Structuring and taking naughty former staff to court
7 min read
21 February 2017
Departing employees are often well-placed to make use of confidential information. That’s where restrictive covenants come in.
While staff have a duty of confidentiality, it won’t prevent them from divulging secrets after they leave. And given that information is so readily available these days, it’s becoming harder to stop the details of your business escaping into the outside world. That is, unless restrictive covenants are part of the picture.
What are restrictive covenants?
It’s a restraint on employees that kicks in the minute they leave your employment, preventing them from stealing staff or using information for a period of time. While not always easy to enforce, restrictive covenants exist for a reason – don’t go the way of Google in December 2016 when it found itself the target of a lawsuit. It allegedly implemented a spying program to keep track of what information employees were exposed to in order to prevent a leak.
So what do you need to know to steer clear of ending in the same situation? First off, there are different types of restrictive covenants, with the right one for you depending on what it is you’re looking to protect.
Confidentiality covenants prevent trade secrets coming to light, non-competition covenants prevent former staff working in a similar job for a rival, and non-dealing covenants stop them speaking with your customers and suppliers.
There’s also a geographical area covenant, which will force ex-employees to work in a different location, and non-enticement covenants that prevent current workers from being poached.
How to go about structuring one
As a rule of thumb, restrictive covenants should be introduced as part of certain employment contracts before commencement of work. We say certain as it shouldn’t be used for all staff – this will only be frowned upon in court. It will be largely applicable to more senior staff – those in contact with the sensitive information you want protected.
Of course, it can also be implemented later on when someone faces promotion, or if staff duties have changed – just be up for negotiation as some will not willingly agree to restrictions right off the bat, even if they get a pay rise.
But take a change of contract as the opportune time to add or alter restrictive covenants – adding it as a quick addition in the employee handbook will prove to be problematic. If there’s anything the 2007 case of Crowson Fabrics Limited v Rider and Others taught us, it’s that you need clear evidence that employees agreed to the clause.
Keep it short, have the scope of it be wide and define as much you can as it will benefit you in the long run. Any restriction on location or time away from work must be justified. Most restrictive covenants also last for six-12 months. The more time you add, the more difficult it will be to defend in court.
The confidential information you wish to protect will need to be sufficiently described – the court needs to be satisfied that staff truly had access to a legitimate business interest.
And while it’s an old case, Nordenfelt v Maxim Nordenfelt & Co, which took place in 1894, highlighted the need for the clause to be “no wider than reasonably necessary”. It’s why we have the blue pencil doctrine today.
Garden leave: A tricky situation
By definition, garden leave ensures staff don’t work elsewhere during their notice period. But here’s where it gets tricky. If your clause lasts for a long period of time, the court may not be in your favour if you look to bring out the garden leave card. So if you’re looking to implement a restriction close to the 12 month line, then don’t combine it with garden leave.
Enforcing restrictive covenants when need be – and the alternatives
When you know someone has breached a restrictive covenant, you should first consider whether you have the finance or time to take this approach. It’s worth storing computer records and email correspondences galore. This way, you could negotiate with the former employee and agree on a compromise.
If you’re uncertain whether the new employer knows of the restrictions, then an email in the boss’s direction can put a stop to everything as well. It’s best to do so before seeking action.
You can always be gung-ho and take them to court though. The evidence works just as well here. You’ll need to seek a court order, whereby the court will consider the circumstances – and has the discretion to decline your case. It will also take note of whether you acted unreasonably in the pre-action stage.
Essentially, there are two big conditions you have to meet if you want a chance at court – the first being a valid interest, and the second being that it’s reasonable for both parties.
The court will use a blue pencil to strike out unreasonable sections of the covenant to see if what is left behind still makes sense. If it does, then the clause is amended and promptly enforced. So as much as you want to protect your assets, ensure the law doesn’t have to take a blue pencil to your restrictive covenants in the first place. Being fair is a good place to start.