Protecting Business Interests in Employee Contracts
(How to stop your senior employees leaving and setting up in competition with your business).
Many small and medium sized businesses do not fully appreciate the important of including restraints on competitive activities in the contracts of employment of their senior employees. The reality is that, in the absence of valid contractual restraints, there is nothing to stop an employee leaving your business and contacting all of your customers with a view to taking their business elsewhere. In a recent case where Lemon & Co Solicitors represented the employer, the senior sales manager left the company and wrote to every single customer offering exactly the same product at a discounted rate.
There is a common myth that restrictions on the competitive activities of ex-employees will always be invalid. The origin of this misunderstanding is the view that the only possible restraint is one that stops an employee working at all for any competing business. This is known as a ‘non-compete clause' and it is correct that this is the most difficult restraint to enforce. The courts are only prepared to enforce post-employment restraints where the restriction is no wider than is necessary to protect the employer's legitimate business interests (it must be the minimum necessary protection). The courts will often take the view that a complete ban on working for a competitor is broader than is necessary and that it is unfair to enforce a restraint that will prevent the employee making a living in their chosen area of work. However, there are a number of alternative restraints on competitive activity that are much more likely to be enforceable. The most important kinds of restrictions are as follows: -
- The employer can put a narrowly drafted ‘non-solicitation clause' into the contract of employment. This clause is designed will prevent employees from contacting your customers for a period of time after the end of their employment (typically 6-12 months). The non-solicitation clause must be restricted to current or recent customers and must be limited to customers with whom the employee has had personal dealings. However, provided that the non-solicitation clause is narrowly drafted, it is likely that it will be enforceable.
- The limitation of non-solicitation clauses is that they only prevent employees from approaching your customers and do not prevent your employees from dealing with customers who contact them. There is sometimes a natural gravitation of customers towards an employee who has left and it is sometimes difficult to show whether the employee or customer made the first contact. In these circumstances, the employer will generally be well advised to have a ‘non-dealing clause' in the contract of employment which will prevent the employee from having dealings for a limited period with the customer even where the customers makes the first approach. The non-dealing clause is more difficult to enforce than the non-solicitation clause but a narrowly drafted non-dealing restriction is still likely to be enforceable in most circumstances.
- The employer will often build a long notice period (for example 3 or 6 months) into the contract of employment and have a garden leave clause. This will allow the employer to make the employee stay at home on garden leave if the employee gives notice. The employee will not be able to set up in competition during the notice period and may be prevented from having contact with customers. This will give the employer an opportunity to arrange a transfer of customers to the new employee.
This is only a brief summary of the relevant law but the important point for businesses is that the three restrictions described above will generally be enforceable and will provide a substantial degree of protection for your business in the event of an employee leaving and wanting to set up in competition.
October 2008
This article gives a general overview only and the legal position at the time of writing this article. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print. For further information and advice, please contact Paul Archer or Lauren Harkin on 01793 527141 or alternatively by email on Paul.Archer@lemon-co.co.uk or Lauren.Harkin@lemon-co.co.uk.
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Many small and medium sized businesses do not fully appreciate the important of including restraints on competitive activities in the contracts of employment of their senior employees....</p>
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