We are a medium sized IT company. One of our senior programme developers (Ned) has just resigned and is going to work for our main competitor. Ned has been with us for several years; he led the development of one of our software packages, which is currently the market-leader and has been a well respected team leader for the technical staff. We are very sorry to lose him. Although he will be difficult to replace, we are more concerned that he will be working for our main opposition (and helping them to improve on our software) and that he might try to take our technical team with him, as his new employer is looking to expand their technical capability. We are currently in ‘damage control’; none of our other employees have resigned yet, but our managing director is very exercised about the situation.
All of the technical team have the same restrictive covenants in their employment contracts, which all run for 12 months. The covenants say that the employees cannot work for one of our competitors for a year and cannot solicit our employees to work for a competitor (or solicit our customers to move to their new employer).
What can we do to protect our business?
Potential team implosion
I completely sympathise with your position. Unfortunately this is a situation that arises frequently and it poses very real commercial issues for employers.
The general rule is that post termination restrictive covenants are generally regarded by the courts as unenforceable (because they are a seen as a restraint of trade and unfairly limit the employee’s ability to earn a living). Consequently the only way to impose restrictive covenants on employees is to incorporate them into a signed employment contract and to ensure that the covenants are very carefully drafted.
The only covenants that will be enforced by a court are ones that are necessary to protect the employer’s legitimate business interests. Of course an employer’s legitimate business interest has to be balanced against an employee’s right to work in their area of expertise and the general prohibition on employers acting in a way that unfairly restricts the trade of its competitors. Covenants that are too widely drafted and go further than simply protecting the employer’s legitimate business interests will be struck out. That is the most undesirable outcome as it leaves the employer with no protection whatsoever. Even worse, the decision may mean that the restrictive covenants in the employment contracts for all of your other employees are also not effective. Whilst that would leave employers in a legal ‘pickle’, you would also have to handle a PR nightmare with your remaining employees, customers and your competitors.
So what do enforceable restrictive covenants look like? Unfortunately there is no ‘one size fits all’ answer. What is reasonable to protect the employer’s interests will depend on the specific nature of your business (including the norms in your industry and your geographical location) and the seniority, skill-set and reporting lines of the individual employee. For example the covenant can only restrict the employee from doing tasks that he or she carried out whilst employed by you or from soliciting staff that they knew or worked with. Similarly it will not normally be regarded as fair to impose worldwide restrictions.
The length of the covenant is often an area for concern. Many covenants are likely to be unenforceable simply because they run for too long. Employers can only restrict the employee for a length of time that will be necessary to allow the employer to take steps to protect itself (ie by employing a replacement, allowing other employees to develop relationships with your customers and for the passage of time to atrophy (or make redundant) the employees’ knowledge about your business). Longer covenants will usually be allowed for senior employees (who pose a greater risk to the business and where it will take the employer longer to ‘plug the gap’), but they are generally unenforceable for junior employees.
It is important to remember that where you have a ‘team move’ your business may be at risk if one or more of the employees are not bound by restrictive covenants – for whatever reason. This because in practice the employees who are bound will simply get the unrestricted employees to do the restricted activities.
As you can see the knack is to draft the covenants so that they cover the risk to the employer posed by the individual employee, but no more. Covenants also need to be regularly reviewed as employees change roles or they become more senior.
With all of that in mind, what can be done about Ned and the team? Although Ned’s covenants may well be enforceable, I suspect that the junior employees’ covenants will not (because they are too long). However, that may not be a huge concern for you at the moment; none of them have resigned as yet, and if you can hold Ned to his covenants, there is little risk of them leaving.
You should write to Ned to remind him of his covenants and ask him to sign undertakings that he will abide by them. With a new job on offer, Ned is unlikely to agree to sign the undertakings – especially if he thinks that they may be unenforceable. Very often a new employer is all to-happy to provide legal support to assist the employee to defend these types of claims.
In that situation you would have to apply for an interim injunction to stop Ned from acting in breach of his restrictive covenants. You would only be successful if you could prove to the court that the restrictive covenants were necessary to protect your legitimate business interests. If you were successful, the injunction would apply until a full trial could be held to determine the issues.
Remember that restrictive covenant disputes normally settle before trial, even if an interim injunction has been ordered. Most employers are extremely reluctant to debate the enforceability of their covenants in public and the employees are often willing to accept a degree of restriction simply to allow them to get on with their new role, unencumbered by the past.
You can register online or follow us on Twitter or LinkedIn to receive our latest news, events and publications.