Restrictive covenants and the “stolen” employee

Future business protection

Restrictive covenants are designed to limit an employee’s commercial activity once their employment terminates. While the default position is that restrictive covenants are void (for being an unlawful restraint on trade and against public policy) they can be successfully enforced, provided that they:

• Are reasonable
• Go no further than is necessary than to protect a legitimate business aim (i.e. protection of confidential information, trade secrets or key contacts/customers etc).

Common misconceptions

Restrictive covenants are routinely used in employment contracts for mid-tier to senior employees and directors. However, common misconceptions are that restrictions can be implemented with a “one size fits all” approach and that they will be relevant for the full duration of employment. Frankly, these misconceptions couldn’t be further from the truth.

Tailoring restrictions

Before implementing restrictions, employers should consider the employee’s level of seniority, access to confidential and sensitive information, contact (including the regularity and relationship type) with customers and level of internal and external influence. These factors will help determine what restrictions are reasonable and proportionate.

Review of restrictions

Employers will also need to ensure that the restrictions are reasonable at the time that the employee is entering into them. This is crucial. Restrictive covenants should not be drafted with a view that they “may” be appropriate later. To this end, restrictions should be reviewed at certain times.

The promotion of an employee is a key trigger for a review. As employees progress, increased seniority typically brings with it greater responsibility, wider access to confidential information and an increased level of influence. In turn, these individuals may also have access to more lucrative options elsewhere. The more experience gained, and the more contacts made, the better the opportunities.

Accordingly, it’s imperative that employers carry out a full review of an employee’s contract (including restrictive covenants) and upgrade provisions where appropriate. Relying on stale and out of date restrictions (or, in some cases, no restrictions whatsoever) will not serve an employer well.

Primed for the picking

Employees succeed in the workplace and become more commercially appealing to competitors as time ticks by. While employees may start out with the best of intentions, heads can be turned with the promise of greener pastures.

Employees who are in a “primed for picking” mindset leave their current employers open to risk. These individuals are more open minded with regards to discussions with competitors looking to “steal ” well performing and experienced employees. Why would a competitor run up recruitment expenses when it could simply research the local industry/sector, approach employees of other competing companies directly and offer them a far greater financial package? This way they cut out the middleman (the recruiter) and, instead, channel the money saved directly into the pocket of the incoming new starter.

Scenarios like this are becoming more common and, to an extent, can be avoided. In addition to the careful tailoring, review and, where appropriate, update of restrictive covenants, employers should also consider what may be driving their employees to go elsewhere. What may trigger staff being in a “prime for the picking” headspace?

Factors to consider include:

• Standard (or low) pay
• Lack of career progression and/or having missed a promotion opportunity
• Lack of bonus, commission or pay rises where the employer is performing well financially
• Personal changes requiring the employee to think more carefully about their finances (e.g. welcoming a child, or going through a divorce)
• Workplace stress
• Poor relationships with line managers and/or leadership.

Prevention is key

It’s useful for employers to regularly check in with their employees and maintain an overview as to motivation levels and engagement. This will assist them in proactively responding to any issues before they escalate.

Communication is key and so are the following mechanisms for retaining key talent:

• Retention bonuses
• Pay rises
• Enterprise Management Incentive (“EMI”) schemes
• Regular one-to-ones with staff
• Implementing a clear career progression scheme
• Keeping an active eye on the market, including market rate pay and benefits.