Restrictive Covenant

Hi all

I wonder if any of you can help me with an interesting question presented to me today.

I'm working with a company who are pretty unique in their line of work. They are expending rapidly and are concerned about confidentiality as their competitors would be very interested in how they operate.

I'm reviewing their contracts and the MD wants to add a value (pretty high) to the restrictive covenant which states the employee cannot divulge information to another company. Therefore if the employee leaves and takes information to a competitor they can by pursued for the sum. The reason behind this thought is loss of information would put the competitor at a significant advantage and could damage the company profit margin.

Has anyone got experience of implementing contracts with a clause of this type or know if its possible to do?

Thanks in advance

Claire

Hi Claire

Restrictive convenants would be appropriate in the circumstances where the empoloyer has a legitimate business interest to protect.

As you probably know these can fall into several different areas such as non-compete, non-soliciatation, non-dealing and non proaching and should be written in such a way that they extend no further than is reasonably necessary to protect those interests.

Employers can take a number of steps against employees who fall foul of their restrictive covenants, both financial and non financial.

Typically an injunction can be used by an employer to stop an employee breaking the restrictive covenant terms of the contract and from working for a new employer. Another option is a springboard injunction to avert an ex employer suffering serious economic loss as a result of an ex employee benefitting from breaching their contract, for example where confidential information is used to benefit the business of a competitor as you have indicated in the example above.

Financial action includes suing the ex-employee for damages for any loss that results from breaking the restrictive covenant contractual terms, as well as applying for an account of profits – for example an account of profits from an ex-employee’s new employer where that employer has benefitted from confidential information after the ex-employee broke a non compete clause and joined the competitor employer.

So in summary I would not be minded to specifiy a sum of money within the contract, but would explain the options which would be available at the time should a breach occur. If the MD thinks this is a significant risk to the business then he/she should consider running the PTRs past an employment lawyer who specialises in these.

Another consideration is that remember when the employee on an existing PTR changes roles, to ensure that those especially moving into a senior level are given new PTRs to reflect the new role, and also so the employer can show that consideration has been given for these. In addition that PTRs are not enforceable in cases where the employer has breached the contract e.g. wrongful dismissal and constructive unfair dismissal cases.

I hope this helps

Sarah

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Sarah Loates November 6, 2017 at 6:26pm

Hi Claire

Restrictive convenants would be appropriate in the circumstances where the empoloyer has a legitimate business interest to protect.

As you probably know these can fall into several different areas such as non-compete, non-soliciatation, non-dealing and non proaching and should be written in such a way that they extend no further than is reasonably necessary to protect those interests.

Employers can take a number of steps against employees who fall foul of their restrictive covenants, both financial and non financial.

Typically an injunction can be used by an employer to stop an employee breaking the restrictive covenant terms of the contract and from working for a new employer. Another option is a springboard injunction to avert an ex employer suffering serious economic loss as a result of an ex employee benefitting from breaching their contract, for example where confidential information is used to benefit the business of a competitor as you have indicated in the example above.

Financial action includes suing the ex-employee for damages for any loss that results from breaking the restrictive covenant contractual terms, as well as applying for an account of profits – for example an account of profits from an ex-employee’s new employer where that employer has benefitted from confidential information after the ex-employee broke a non compete clause and joined the competitor employer.

So in summary I would not be minded to specifiy a sum of money within the contract, but would explain the options which would be available at the time should a breach occur. If the MD thinks this is a significant risk to the business then he/she should consider running the PTRs past an employment lawyer who specialises in these.

Another consideration is that remember when the employee on an existing PTR changes roles, to ensure that those especially moving into a senior level are given new PTRs to reflect the new role, and also so the employer can show that consideration has been given for these. In addition that PTRs are not enforceable in cases where the employer has breached the contract e.g. wrongful dismissal and constructive unfair dismissal cases.

I hope this helps

Sarah
Leanne Day November 6, 2017 at 4:02pm

Hi Claire

Yes, I use protective covenants. Are you looking for non compete, non-solicitation, or both?

Also, are the contracts just for the UK? Some countries you have to pay a percentage of the salary for the covenant to be enforceable.

Happy to help further if I can.

Thanks

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