Restrictive covenants offer an important line of defence in safeguarding a company's business interests. Karen Seward and Allison Healy explain the contractual details
The recent high-profile litigation involving ACE and John Charman has prompted employers to look carefully at the small print of key employees' contracts to ensure that their business interests are adequately protected.
The personal rapport between underwriters and brokers generates long-standing and lucrative business relationships. However, staff working in teams often exhibit greater loyalty to colleagues than to their employer.
It is, therefore, essential that employers protect their business by ensuring that goodwill generated through these relationships does not evaporate when an employee leaves employment and that their workforce remains stable when the team lynchpin leaves.
Employment contracts should, therefore, contain appropriate restrictive covenants. These must be drafted to be limited in scope and, therefore, legally enforceable.
Typical covenants seek to prevent employees from: using confidential information acquired during employment; soliciting business from clients with whom the employee had contact; dealing with clients where the client seeks out the employee with no active solicitation by the employee; enticing staff to resign; and participating in a competing business.
Before resorting to restrictive covenants, bear in mind that it is always easier to monitor employee activities while they are still under contract, so hold employees to their notice periods. The length of notice should reflect an employee's importance to the business. A properly drafted garden leave provision also enables employers to keep an employee out of circulation for at least part of their notice period.
Unenforceable
If covenants are required, remember that less is more. A covenant will always be unenforceable unless an employer can demonstrate it is reasonable when considering the interests of both parties and the public.
For the covenant to operate successfully, an employer must show that:
1. It has a legitimate business interest capable of protection (for example, customer connection, confidential information, stability of its workforce)
2. The covenant goes no further than is reasonably necessary for the protection of that interest.
It is tempting to impose covenants on employees which prohibit virtually any activity anywhere in the world for a long period of time. Such covenants are certainly unenforceable. A better approach is to consider what protection the business reasonably requires and to tailor precisely the covenants to the particular employee. And the holders of back office jobs in human resources or finance should not really be subject to covenants save for those that prevent them enticing colleagues away.
When drafting covenants it is important to consider the nature of the employee's work and where he has worked or will work. If there are to be geographical restrictions consider the scope of movement of the employee. There may also be activities which it may be advisable for the employee not to perform.
Solicitation
For all these restrictions a time limit may be necessary. Covenants preventing solicitation of staff should be limited to staff of a certain level of seniority and value to the business. In any case it is important to consider the categories of employee with whom he will have dealings.
Employers in breach of contract, for example, those who terminate employment without notice or pay in lieu of notice with no express right to do so, will not be able to rely on restrictive covenants as they will be considered to have ripped up the contract. Employers must incorporate an express clause permitting this in the contract.
Where the employer has terminated employment and is securing a waiver of the employee's rights, possibly for financial compensation, review the covenants to see if their enforceability can be improved
and to reflect accurately the position at the termination date.
The law on restrictive covenants is extremely complex, so specific advice on their drafting and enforcement should be sought in every case. n
Karen Seward is employment law partner and Allison Healy is an associate at international law firm Allen & Overy
Steps to safeguard
If you suspect that an employee has breached or that there is a serious prospect of his breaching his restrictive covenants, do not delay:
covenants, requiring a swift (ie within a couple of days rather than a week) response. This step must be taken before seeking an injunction
