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Companies can protect their know-how and client lists from former employees with well-drafted contracts.

In an increasingly specialised industry, the minds of manufacturers are often more valuable than the machines, and manufacturers should be looking for opportunities to protect the know-how that drives their innovation. Restrictive covenants in employment contracts are one means of doing so.

Restrictive covenant clauses can take several different forms in a contract of employment, each with the effect of safeguarding, insofar as is possible, a company’s knowledge and customer base:

  • Non-Compete clauses prevent a former employee from competing with their previous employer.
  • Non-Poaching clauses restrain a former employee from hiring former colleagues.
  • Non-Solicitation clauses stop former employees from taking steps to encourage clients away from their former employer.
  • Non-Dealing clauses prevent former employees from having any dealings with their previous employers’ clients.

We hear an almost uniform refrain from clients when the issue of restrictive covenants arises (usually at a stage when- protect a company’s interests through litigation) – “there is no point in wasting money trying to include them in our employee’s contracts because they’re unenforceable”.

That assumption is unfounded. Our recent experience is of willingness within the judiciary to enforce well-drafted and reasonable restrictive covenant clauses against former employees, contrary to the widely-held belief that they aren’t even worth the paper they’re written on and leaving restrictive covenants out of a contract of employment exposes the company to the risk of losing market position and custom to its steps are being taken to retrospectively – and often fruitlessly competitors. The emphasis has to be on good drafting; clauses can be too wide in scope or too punitive and a court is likely to be disinclined to impose draconian restrictions on a former employee.

A second, less-commonly held view among clients is that clause should be drafted as strongly and as widely as possible to act as a deterrent to former employees. Such an approach errs too far on the side of caution at the risk of enforceability. Instead a middle ground needs to be adopted with a considered and appropriate protection being put in place to protect the company’s interests, expertise and consumers.

The company should consider what it is exactly that it is trying to protect and stick to protecting only that. Be it access to customer records, access to technical expertise or former colleagues, it is worthwhile investing time to understand what an employee’s role will expose him or her to and how and when exploitation of that know-how might prejudice the company’s interests.

Having considered the potential risks, the employment contract should be drafted to include clauses, which include restrictive covenants necessary to protect legitimate business interests, and, in doing so, are reasonable both in scope and duration. This means there can be no one-size-fits-all restrictive covenant clause; our advice would always be to seek legal advice before entering into an employee contract if you think restrictive covenants may be relevant. Not doing so may turn out to be a false economy given the risk posed by a former employee taking with them details of your catalogue, customers and colleagues.

A High Court decision in the case of Decorus Limited v Penfold [2016] demonstrated the value and importance of well-drafted restrictive covenants when finding in favour of a company whose former employee had left along with copies of customer contact sheets and purchase logs. In awarding damages to the claimant company, the judge noted that whilst the original employment contract had contained very widely-drafted restrictive covenants which would have been incapable of enforcement, that contract had since been usurped as part of the internal pay review process by a new contract with more narrowly-focused clauses capable of enforcement.

Absent the re-drafting, the former employee would not have been prevented from making use of confidential and commercially sensitive information, allowing him to pry customers away from his former employee.

The judgment provided some useful indicators as to what a court will consider when deciding upon the enforceability of restrictive covenant clauses:

  • The non-solicitation clause in the contract was deemed enforceable since the protection of confidential customer information was a legitimate business interest and the restriction was limited to six months in duration and only related to existing customers.
  • Similarly, the non-dealing clause was also deemed enforceable because the company could show it had developed a unique business strategy in the provision of its services.
  • In contrast, the non-compete clause was not enforceable since it sought to prevent the employee working in a variety of roles (not just sales) in any of the industries in which he had operated during his employment. This clause was severed from the contract as it was an illegal restraint of trade.