21 December 2018

Protecting your practice: what you need to know about restrictive covenants

The protection of your business connections and confidential information is an essential component of the future sustainability of your practice. Stephenie Malone, a specialist healthcare employment solicitor from Harrison Clark Rickerbys, explains some of the important legal considerations.

The threats posed to your practice by departing employees should not be underestimated. Consider the impact on your business if one of your key employees – or even worse, a team of key employees – left, potentially at short notice. They may have decided to join your rivals or set up a competing practice themselves. More worryingly, they may be working towards this whilst employed in your practice, taking key client information from under your nose with the intention to resign once they have the information they need.

It is essential for practices to have the right level of protections in place. The first steps is to include provisions in your contracts of employment to guard against these risks.

Employers commonly underestimate the damage such action can bring, and see the likelihood of it happening to them as non-existent. You may feel reassured because key veterinary practice staff have been employed for a number of years, perhaps joining you shortly after professional qualification or as a trainee. You may think your practice staff are loyal and you work in a harmonious and collegiate environment.

It is a common misconception that restricting the activities of your employees after they leave is not worth the paper the contract is written on. That is only the case where the post-termination restrictive covenants are ill-considered and poorly-drafted.

The purpose of including restrictive covenants in the contract of employment is to restrict the activities of the former employee for a defined period. This should only be for so long as it will take the practice to secure customer relationships and to reassure other staff that they should remain with the practice and discourage them from being poached by the departing employee. This is known as protecting legitimate business interests. Courts will not enforce restrictive covenants if they go beyond what is “reasonable” in the protection of those interests, both in duration and geographical radius.

Giving restrictive covenants careful consideration at the time of drafting your employment contract is time well spent. A court will not imply restrictive covenants into an employment contract where none have been included, so it is not capable of introducing protection “after the event” regardless of how the employee has acted.

Factors to consider when drafting restrictive covenants

What is the employee’s job role?

In theory, more junior members of staff may not need restrictive covenants or only limited provisions in time and scope. However, if they are in client facing roles, have opportunities to build up rapport with clients and have access to client information, they could seek to solicit customers if they move practices.

For more senior team members it is usually reasonable to restrict their activities for longer periods post-termination – with 18 – 24 months usually being the maximum period. In vet practices, 12 – 18 months is commonplace.

Consider how frequently customers use the practice. In periods of good health for their animals would the customer only use the practice annually? If so, it is reasonable to have a longer period of restriction than 12 months to take account of annual check-ups/ treatment – consider 15 months.

How unique is the work of the employee at the practice?

Unless your practice offers a service which is truly unique and not offered anywhere else in the country, preventing a former employee from working in competition anywhere in the UK will not be upheld as enforceable by a court. If you are a city practice with many local competitors, then it may not be reasonable to prevent the employee working in competition within a few miles radius of your practice. It is better in these circumstances to rely on non-dealing and non-solicitation provisions.

Could the employee entice other colleagues to follow them to their new place of work?

Losing more than one employee can seriously damage the practice’s ability to operate. It takes time to recruit a replacement, particularly if your employees only have to give a brief period of notice of their intention to leave. Consider whether you could cope with junior team members but would want to restrict the poaching of staff at a certain level. Should you require employees to give longer notice of termination to enable the practice to manage the transition of exiting the current employee and recruiting a replacement.

It is essential to include a provision against the misuse of confidential information in your employment contracts. Different to restrictive covenants – it applies during and without time limitation after employment has ended – it goes hand in hand with specific restrictive covenant provisions.

Legal actions for breaching restrictive covenants and misusing confidential information are based on common law duties to act with good faith and integrity towards a former employer and not a breach of a specific legislation. As a result, much of the law in this area has developed by case law.

Whilst each case turns on its own facts, case law provides some interesting points to note:

Nike – in a US action (the principles apply equally to UK businesses)

This is an extreme case which shows the extent employees will go to when taking confidential information to join a competitor. Three senior designers left to join Adidas, allegedly taking high value trade secrets and confidential information, including:

– High level strategic development plans;
– Unreleased product designs;
– Financial data including an historical breakdown of sales; and
– Marketing strategies.

The extent of the information taken was significant, but more shockingly the actions of the employees was brazen: they took deliberate and considered steps to conceal their tracks. They deleted emails, reset their phones to factory settings and damaged computer hard drives to the extent that it was believed that the data would be entirely unrecoverable.

Once aware, Nike immediately launched action to prevent the misuse of confidential information and trade secrets. The case subsequently settled.

It shows the devious methods employees will use to hide their actions, including trying to erase the electronic evidence of their wrongdoing. Often, forensic analysis of computers, mobile phones and other electronic devices will be needed to uncover the steps the employees have taken.

Warm Zones v Turley & Buckley

Finding evidence to confirm suspicions of misuse of confidential information can be challenging. Without it, a court will not issue an order (known as an injunction) to prevent the ex-employees from continuing to act in alleged breach of their restrictive covenants

This High Court case demonstrates the actions a court can take if there is good reason.

The contracts of employment of two employees prevented the use or disclosure of confidential information. Warm Zones discovered documents which indicated that both the former employees had disclosed or were prepared to disclose details of confidential information.

The court granted an order for the inspection of the employees’ home computers, having considered:

– the unconvincing explanation by the ex-employees of the documents
– one of the employees had volunteered to an inspection of her computer (which she later withdrew);
– that if there had been no misuse of confidential information the inspection would not reveal anything untoward and that would bring any litigation to a swift conclusion.

The case demonstrates the scope available to an employer with serious and well-justified concerns of misuse of confidential information. Further, it demonstrates that courts will allow employers to inspect devices belonging to employees.

Key considerations for securing maximum protection for the practice

  • Include restrictive covenants and confidential information usage in your employment contracts as standard
  • Tailor the extent of the restrictive covenants to the threat posed by the employee
  • Don’t panic if you haven’t included clauses in your existing contracts of employment – you can introduce them at a later stage, at any time you are providing an enhanced package to the employee (legally defined as “consideration” – in order to create a valid contractual provision) for example, on promotion or when awarding a pay rise. However, the employee must agree to the new provisions – either expressly or by working under the new contract without objection
  • Remind departing staff of their obligations by issuing a standard letter when they are leaving the practice – often this acts as a reminder and/or a deterrent
  • Don’t underestimate your employees – if your suspicions are raised that they are up to something, investigate! You may be able to prevent them taking valuable information
  • Monitor access to confidential information and trade secrets – only allow access to those who need it – do not take the risk
  • Take steps to protect your customer relationships: if you are concerned an ex-employee is soliciting customers, find a reason to contact customers – particularly if you haven’t seen them in the practice for a while or if they have missed annual checks. The ex-employee may have persuaded them to move their practice, but there is nothing to stop you winning them back!
  • Action can be taken if you believe their new employer is inciting them to use confidential information or to act in breach of their restrictive covenants. The new employer can be included in court action
  • Ask new recruits if they are contractually bound by restrictive covenants and ask to see them – don’t let them use any information, solicit clients or poach former colleagues when you know it would be in breach, and don’t let anyone else do so on their behalf – well-drafted restrictions apply to them acting directly or indirectly
  • Recognise that enforcing restrictive covenants is costly. The legal fees for an injunction are significant and incurred quickly. If successful, the practice recovers damages (which are pure financial losses). This is why evidence gathering is key to justify court action. Keep records to assess the financial loss. A first step is commonly to ask for undertakings from the employee (promises not to act in breach).

If you would like further information about the HR and employment law issues surrounding restrictive covenants and confidential information, please contact Stephenie Malone (Associate Solicitor – Healthcare and Veterinary Specialist) at Harrison Clark Rickerbys solicitors.

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About the Author
Stephenie Malone, Senior Associate Solicitor
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