Restricting Competition from Ex-employees

In 2014 the UK is a highly knowledge based economy with considerable economic value tied up in the information created, stored and utilised by businesses. To take commercial advantage of information assets such as technology, know-how or customer details it is usually essential that employees are given access to it.

When employees are let go or decide to move on of their own accord there is always a risk that they will be able to use that information to compete with their former employer. Although it is impossible to prevent this in its entirety for both practical and legal reasons, there are useful restrictions that can be incorporated into the employment contract to limit potential damage. These are known as restrictive covenants.

General Provisos with Restrictive Covenants

The weak economy has meant that employers have generally had the upper hand in negotiations with potential employees over salaries and other details. It is tempting to think that this has given employers free rein to negotiate watertight employment contracts to limit future competition. However, when it comes to preventing the use of trade secrets or customer contacts by former employees, bargaining power is not necessarily the most important factor in play.

The limits on what employers can do to protect their business by demanding restrictive covenants come down to how such covenants are interpreted in practice. Employers must take care to avoid clauses being too far-reaching otherwise they may effectively become void.

It is worth bearing in mind that even limited restrictive covenants can act as a deterrent to ex-employees.

Restrictive Covenants: Types and Considerations

There are various types of restrictive covenants which may be imposed upon employees including:

i) Non-solicitation – prevent former employees soliciting customers.

ii) Non-dealing – prevent former employees dealing with customers.

iii) Non-compete – prevent former employees from working for a competitor or setting up in competition.

iv) Non-poaching – prevent former employees from poaching former colleagues.

v) Confidentiality – prevent former employees from disclosing certain confidential information.

Considerations that employers should take into account when considering the extent of these clauses include:

i) The position, skill level and seniority of the employee. There must be some degree of connection between the employee subject to particular restrictions and the information that is being protected. The type of information is also important; specific trade secrets will be easier to restrict for example than more readily obtainable information such as market information.

ii) The geographical scope of the restriction. The wider the geographical area encapsulated within a restrictive covenant, the greater the risk of it being void.

iii) The time length of the restriction placed upon the employee. Again, a greater length of time creates a greater risk of voiding a restrictive covenant. Beyond 6 months requires significant justification.

Enforcement

As noted above, restrictive covenants can act well as a deterrent. However, if serious breaches do occur it may be possible to obtain injunctions to prevent further use of protected information or damages if losses can be shown.

For specialist advice regarding restrictive covenants or other elements of employment law, contact Aneil Balgobin today via e-mail ABalgobin@rollingsons.co.uk or by telephone on 0207 611 4848.