What to do when your new recruit comes with restrictive covenants
Brachers has seen an increase in the number of restrictive covenants in all types of employment contracts, regardless of the employee’s seniority. This means disputes are also on the rise over these somewhat ‘restrictive’ provisions seeking to prevent individuals from several actions post-employment, including working for other organisations.
In this article we will focus on the new employer, that is, the organisation who has made an offer to an individual who already has restrictive covenants in place with their ex (or soon to be, ex) employer. You can imagine the scenario, lengthy recruitment process, interviews, second interviews, perfect candidate found, pre-offer checks made, references sought, offer made, offer accepted… “oh there is something in my employment contract saying I shouldn’t work for a competitor, can I still come and work for you”… then what?
We are often asked what can be done in these situations and companies are right to think that these types of restrictions can be upheld in court and can prevent individuals from carrying out certain actions. We explore below this delicate area and set out some tips should you find yourself in this situation:
In this article, we will use the following terminology:
- Individual: The employee who has either left, or is about to leave, the “Ex-employer” for whatever reason (when it comes to restrictive covenants, it usually does not matter whether the individual resigned or was dismissed). This individual has signed an employment contract with the “Ex-employer” which contains restrictive covenants.
- Ex-employer: The organisation who has been employing the Individual and has put in place the employment contract containing the restrictive covenants. For whatever reason, the Individual’s employment has, or is about to, come to an end with this organisation.
- New Employer: This organisation who wants to employ the Individual who has signed restrictive covenants with the Ex-employer. For the purposes of this article it is immaterial as to whether the New Employer is looking to put in place new restrictive covenants with the Individual.
What can the restrictions do?
To recap, a restrictive covenant essentially seeks to limit an individual’s actions post-employment. They can come in different forms and you might see all, some or none of these in an employment contract.
The most common types of restriction are:
- Non-compete clauses, which seeks to prevent the employee working in similar employment for a competitor.
- Non-solicitation restrictive covenant, which seeks to prevent the employee from approaching former customers, clients or suppliers with a view to taking work from them.
- Non-dealing clause, which seeks to prevent the employee from having any dealings (usually in a business context) with former clients, customers or suppliers, regardless who made the first approach.
- Non-poaching restrictive covenant, which seeks to prevent the employee from poaching former colleagues.
In addition to these, there may be confidentiality provisions and other clauses preventing a team move.
The key word noted above is ‘seek’ – the restrictions seek to restrict the employees. Restrictive covenants can vary greatly in length of time and also in geographical scope. It is trite law that as soon as a restrictive covenant is too wide in scope whilst looking at the technical guidance, the protection will fall away. It is for this reason that extreme care is required when drafting and devising restrictive covenants. Any ambiguity over what the restriction is trying to do, or if there is an argument that the restriction is wider than is strictly necessary to protect the company’s ‘legitimate business interest’ will lead to queries and disputes over its enforceability and possibly render the restriction as void.
By way of example, the courts have demonstrated how tricky restrictive covenants are to get right. In the case of Tillman v Egon Zehnder Ltd , Ms Tillman was prevented under a contractual restrictive covenant from being “interested in” any competing business for a period of six months after leaving her employment. The inclusion of the words “interested in” was held to be too wide, although the Supreme Court eventually concluded that the words could be deleted from the clause, meaning the employer could still rely on it to potentially protects its business interests.
What does this mean for you as the new employer?
An organisation recruiting someone with restrictive covenants would be wrong to think it is not an issue to concern them, particularly if the Ex-employer is a competitor and if they deal with the same suppliers or customers. This is because the New Employer can also be potentially sued if the Ex-employer takes such an issue with the new arrangement and tries to claim that the New Employer has induced the Individual to breach their contractual restrictive covenants. Conspiracy and inducement to breach an employment contract are economic torts. The New Employer can only be held accountable however, if the Ex-employer can show/prove that the New Employer was fully aware of the restrictive covenants. It is for this reason you will often find that the Ex-employer will send the New Employer a copy of the Individual’s employment contract to avoid the New Employer claiming that they had no knowledge.
If the ex-employer is serious about enforcing the restrictive covenants, in our experience, it has always been the case that they will look to sue both the Individual and the New Employer, the latter of course nearly always having deeper pockets to pay any damages that might be awarded.
Whilst it is noted that a new employer can only be responsible if they are aware of the restrictive covenants, that is not necessarily a good reason to recruit and turn a blind eye to the possibility that the Individual has relevant restrictive covenants. Quite the contrary, it is often the case that we would advise that you are better off knowing from the outset whether there is the possibility of any issues on this front and tackle them before they escalate with an injunction letter coming through the post. Restrictive covenant litigation is extremely costly for all concerned, which is why devising a strategy on how to reach an amicable solution is usually the better approach all round.
Tackling restrictive covenants
We usually find that it is more likely that an Ex-employer is going to try and enforce their restrictive covenants against the key employees, holding the more senior positions (and hence the more confidential information). Although this is not always the case. One particular matter we have handled recently involved a mid-level manager, but this individual dealt with the majority of the organisation’s clients and was therefore critical to the operation of the business. When that individual secured another job with a competitor and sought to take those clients with him, this was worth protecting and the restrictive covenants were relied upon and successfully enforced.
To highlight, there are a number of things that an employer, in general, needs to get exactly right before they would be advised to embark on such costly litigation and before the courts will enforce restrictive covenants:
If the contract has not been executed correctly or there are questions over whether the employee had read and accepted the terms will naturally question the enforceability of the restrictive covenants. Equally, if new restrictions are put in place when, for example the employee changes roles or receives a promotion, there can be queries over whether there has been appropriate consideration to ensure that they are sufficiently incorporated.
Any breaches of contract?
The Ex-employer will need to be sure that during its employment relationship with the Individual, that it has not breached the employment contract itself by, for example, not paying the correct notice pay. If this is the case, the individual would have good grounds to argue that all existing provisions (including the restrictive covenants) would fall away. This is based on the principle that a party to a contract cannot simultaneously breach a contract and rely on it to try and enforce other provisions in its favour. A particular tricky area is where an employee claims that they have been constructively dismissed.
Case law has shown us that the more bespoke the clauses are and the more the employer can show that they have been tailored to the individual specifically (while looking at their role and the type of information or contact they will be exposed to) the more likely the restrictions will be found to be enforceable. If it is found that an organisation uses the same restrictions for all employees right across the workforce, no matter their seniority, the effectiveness will be watered down.
How the restriction is formed
The wording of any restriction will be scrutinised extremely carefully. If a restriction does not make sense, is vague in some way or goes further than is strictly necessary to protect the ex-employer’s ‘legitimate business interest’, the restriction can fall away.
There are three main points that can assist an organisation as the New Employer moving forward:
First, to conduct due diligence when recruiting new staff – particularly in connection with those who you know are joining from competitors. It will be key to understand/be aware of any contractual limitations there may be in the individual performing their new role. If there are limitations or restrictions which will have an impact, we suggest you seek legal advice to understand the level of enforceability of the restrictions and whether a communication strategy moving forward with the Ex-Employer may assist. While a restriction may not hold much weight in court, trying to get an organisation to understand this tricky area of law is not easy, but we have the skills and experience to approach this.
Set clear parameters with your new recruit
If it is to be accepted that the restrictions are more likely than not to be enforceable, ensure that any conduct by you as the New Employer is not viewed as condoning or inducing any breaches of contract – as noted above, the risk would be that you as the New Employer could be sued.
Add a warranty
If, for whatever reason, you do not see the Individual’s employment contract, consider adding a warranty to your employment contracts to the effect that the Individual is not bound by any continuing contractual obligations (including restrictive covenants) to any former employer which may impinge on their new duties. If you see the contract and agree the Individual is to comply with the restrictive covenants, you could also consider adding warranties to that effect.
How can we help?
Naturally, organisations are sensitive to loosing key employees, particularly if they believe joining a competitor is going to damage their future. And as we have highlighted above, this can be a tricky area of law where litigation can escalate very quickly.
If you would like further information, advice or assistance on preparing for changes to employment law due in 2020, contact a member of our employment team.