Restrictive covenants: tips for before, during and after employment

In times of economic and social turbulence, many people consider their positions within a company and may consider new opportunities. It is essential that businesses have suitable measures in place to protect their intellectual property, confidential information, clients and interests. Restrictive covenants are an effective way to ensure these are secured after an employee has left the business – but there are several practical considerations to consider.

Practical considerations for recruitment

At the recruitment stage, businesses should ask potential new starters about any existing restrictions they may have so that risk can be managed. Are their restrictions drafted too widely to protect their current employer’s legitimate business interests? Has a breach of contract been committed by the previous employer which causes the restrictions to fall away?

If the restrictions are potentially enforceable, consider whether they will impact on the prospective employee’s ability to undertake the role required in your business. Will they be able to carry out the role you’ve asked of them, or will you need to find alternatives for them until the restriction period expires?

If action is taken by a former employer, keep close to any discussions between them and the previous employer. This will help to manage the risk that your business will be joined into any proceedings for inducing a breach of contract.

Where there is a non-dealing restriction, can any leverage be exercised by those contacting the former employer directly? It is important not to involve the prospective employee in any approaches if the restrictions also prohibit direct or indirect solicitation of suppliers, clients or customers.

Ask the new employee for a copy of the restrictive covenants for their previous employment to be kept on their personnel file. Monitor the new employee to ensure that any potential breaches are detected early.

Ensure to build the necessary protections into the employment contract once you have secured a new hire – and that contracts are signed to protect the business as much as possible. Restrictive covenants should be reviewed when an employee is promoted, and any changes should be expressly agreed in a new employment contract.

Where there is an international element, at the outset of the contractual relationship an employer should carefully consider the most appropriate governing law and jurisdiction to enforce restrictive covenants to protect the business.

Practical considerations for exiting employees

As soon as an employer becomes aware that an employee, or team of employees, intends to leave it should act quickly to protect its position. The following risk assessment will help determine your strategy:

• What are the restrictive covenants in the employment contract?
• Are the restrictions enforceable?
• What is the employee’s level of seniority?
• What data and contacts do they have access to?
• When and where is their new role? What is the potential impact of a breach of covenant on your business?

You should immediately set up a meeting with the leaver to discuss their restrictive covenants. If possible, try to agree what they can and can’t do from that point. You should also let your IT and HR teams know about the leaver and any agreements you have reached with them and monitor their activities.

Alongside these measures, consider:

• Limiting access to certain accounts or databases.
• Arranging for key files to be moved to another member of staff.
• Invoke a contractual garden leave provision for all or part of the employee’s notice period.

Remedies for breach of restrictive covenant before departure

Where there has been a breach of restrictive covenant, speed is of the essence to limit any damage to the business. Preparation is essential. If a breach is suspected:

• Investigate: has the employee’s conduct constituted a breach of the restrictive covenant? It is vital to properly collate the evidence for the purpose of any court proceedings and at the outset identify the property or information believed to have been taken, copied or transferred.
• Consider the options: litigation is not necessarily the most suitable or cost-effective option. Consider whether the risk to your business is significant enough to justify court proceedings, or whether there are alternative options which may provide adequate protection.

During the restriction period

When an employee leaves the company, the employer can no longer immediately control their actions. As before, you should investigate the breach, collate evidence, and consider your options.

Legal remedies

There are a variety of interim injunctions and remedies available which can, in certain circumstances, be obtained within a matter of days to limit the potential damage to a business when an employee breaches their restrictive covenants. However, these can be expensive and time-consuming. These include:

• Springboard injunctions: an urgent, without notice application to prevent an unfair competitive advantage after a breach of restrictive covenant.
• Order for delivery up: for the return of documents, confidential information, company property and/or other data wrongfully taken.
• Search orders: permitting the search of premises under strict supervision to seek evidence and/or materials obtained in breach of restrictive covenant
• Freezing orders: freeze the assets of the former employee to prevent them from disposing of their assets beyond the reach of the employer thereby making them unattractive to sue for damages
• Order for damages: either for an account of profits obtained because of a breach of covenant (which can be time consuming and complex to calculate) or general damages.

For more information please contact, Elizabeth Beatty, Partner and Head of In-House Lawyer Services.

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