You’ve built up a thriving business with valued clients and staff, but now a key employee has announced they’re leaving and there’s whispers that they’re planning to take some clients and colleagues with them. How can you prevent employees stealing clients?
It’s a common situation, and one that can devastate small firms. That’s why the law allows an option to include restrictive covenants in certain staff members’ contracts.
Lindsey Knowles, head of employment law at Kirwans law firm, explains that restrictive covenants are clauses that restrict employees from taking your business’s clients or staff with them when they leave the organisation.
The four types of restrictive clauses
‘Broadly speaking, there are four types of restrictive clauses; non-solicitation of clients; non-dealing with clients; non-compete and non-poaching of staff,’ she says.
While it may be tempting to automatically include them in every employee contract, restrictive covenants are not enforceable across the board. They should be tailored individually to each role and should be included only to protect your business interests, of which there are three recognised types; trade connections such as your clients and employees, trade secrets and confidential information, and stability of the workforce.
‘They should be limited to a certain amount of time and a certain geographical area and shouldn’t be imposed on those employees to whom they are not relevant,’ Knowles adds.
So, for example, a HR director would not need a restrictive covenant that dealt with non-solicitation of clients or non-dealing of clients, as their contact with them would be limited. You may, on the other hand, wish to include a clause around non-poaching of staff.
‘Even a member of staff who deals directly with clients cannot, in the eyes of the law, be bound by restrictive covenants for clients of the business which they were not aware of,’ Knowles says. ‘Generally speaking, a non-solicitation covenant should be restricted to customers with whom the employee had contact during a specified period before termination.’
How long should the restrictions be imposed?
It’s also important to think about what would constitute a reasonable length of time for which these restrictions should be imposed.
‘It’s a real balancing act,’ says Knowles. ‘Any attempt to impose restrictions deemed as being too strict could result in an ex-employee arguing that they impose unlawful restraints on trade, and the courts could hold the covenant to be unreasonable, void and unenforceable, striking out the claim as a result.’
The crux of the matter is that you can’t stop an employee becoming a competitor. Restrictive covenants having the sole aim of preventing competition are never upheld by the court.
You can, however, protect your business interests, but restrictive covenants need to be carefully drafted to ensure that they are not deemed overbearing.
Also, the clauses should be reviewed for every role change, as a junior member of staff who did not have access to sensitive information or clients and therefore would not have had a restrictive clause in place, may go on to be promoted into a role that deals with precisely those elements, Knowles says.
‘It is important to ensure that there is valid consideration when restrictive covenants are introduced later in the relationship and that they are contained in a signed document, ideally an updated contract of employment incorporating the new terms and restrictions following the promotion.’
It isn’t only clients that can be protected by restrictive covenants; you can also include a clause to prevent employees from being poached, although the level of the employees ringfenced should generally be that of the level of the ex-employee and anyone senior to them in order to argue that the stability of the workforce is a legitimate business interest.
“A non-compete restriction is the strongest covenant you can put in place”
You can include a non-competition restriction but it must be designed to protect your confidential information, trade secrets or customer connections and to prevent the employee from gaining an unfair advantage by exploiting these for their own, or another employer’s, benefit, Knowles advises.
A non-compete restriction is the strongest covenant you can put in place and is generally only enforceable in situations where the employee’s relations with the clients are so strong that it is highly likely that, were they to move to a competitor, the clients would want to move with them. Non-solicitation clauses are therefore looked on more favourably than pure non-competition clauses.
‘Restrictive covenants are worth their weight in gold – but only when used properly,’ says Knowles. ‘It is always in your interests to obtain the employee’s signed agreement to a restrictive covenant, ideally in the employment contract. Any attempt to use them to excess will be stamped on by the courts, so it’s important to seek specialist advice to ensure you strike the right balance.’
It is also important to be aware that even if otherwise enforceable, if you terminate the employee’s contract in breach of its terms, for example terminating employment without giving notice, or breach the contract in any other way, the individual is free from any terms that are intended to survive termination, including post-termination restrictions.