But first what is a restrictive covenant?
A restrictive covenant is a clause in a contract which prevents an employee from providing competition to their ex-employer for a decided period of time after the employee has left the business. Or prevents the ex-employee from dealing with customers of the business by using knowledge they gained of those customers during their previous employment.
This is illustrated by Patsystems Holdings Ltd v Neilly.
N had been hired as an account manager on a salary of £35,000. He was subject to a number of post-termination restrictions in his contract with PH. N was promoted and by the time he left PH he had been promoted to Director of Global accounts and his salary had more than doubled. N joined a competitor in breach of his restrictions. PH's application for an injunction failed. N had held a junior role at the time he had entered into the contract of employment containing the post-termination restrictions. These had not been amended or altered on his promotion. The restrictions were unreasonable for a junior employee and thus unenforceable, notwithstanding the fact of N's promotion and pay rises.
It is important that any restrictive covenants are kept under review. From the employer's perspective, it needs to check:
- Any restrictions are reasonable, both in relation to their scope and duration having regard to the interest the employer wants to protect; and
- They are tailored to reflect the seniority of the employee concerned. It is not simply a case of one size fits all.
Why does it really matter?
Well look at it like this. In the Patsystems case, the employer lost. That means the employee was free to take up work with a competitor. The costs associated with injunction claims are horrendous, we usually advise employer clients to budget no less than £30,000 plus VAT as a minimum. In Civil Courts, the general rule is also that loser pays winner’s costs. Apply for an injunction and fail and you will face:
- Paying your own legal fees which is bad enough, and
- Paying the fees of your opponent - even worse - and
- Creating a perception perhaps in your remaining employees' minds that the contracts of employment are not worth the paper they are written on - commercial suicide maybe?
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