A non-compete restrictive covenant prevents an employee from joining a competitor or starting a competing business for a period of time following the termination of their employment. A non-compete covenant is often found in a contract of employment or another contractual document and is a useful tool in the armoury of an employer seeking to protect a legitimate business interest and therefore its investment in the business and its people.
Below Catriona Watt and Shiv Raja outline some of the key considerations for businesses, and they also discuss these in two of our recent ‘Foxed?‘ podcasts which are available here.
- A business will want to protect interests they have invested time and money to develop.
A business may want to protect its confidential information, the stability of its workforce or its customer and client connections. These are all recognised as “legitimate business interests”. Whilst the courts recognise that express protections such as a confidentiality clause or a non-solicitation covenant may already be present in a contract, these are often seen by a business as being difficult to police so an employer might include a non-compete covenant and argue that it is reasonable in the circumstances.
- It is a common myth that a non-compete covenant is unenforceable.
Whilst the starting position is that a restriction in a contract of employment that prevents post-termination activity will be – as a matter of public policy – void as being in restraint of trade, it is possible for a business to enforce a non-compete covenant provided it proves that the covenant goes no further than is reasonably necessary to protect a legitimate business interest.
- A business should ensure the contract of employment is signed.
If an employee wants to challenge the enforceability of a non-compete covenant, they will be looking for any angles to attack the covenant. It is not unusual for an employer and an employee to negotiate the terms of a contract and then later – when an employee is seeking to challenge a non-compete covenant – discover that the contract was not signed by either or both parties. Whilst the lack of a signature is not fatal to enforceability, it gives an employee an opportunity to argue that they never agreed to the non-compete covenant and are not bound by it. An employer should ensure that the non-compete covenant been incorporated into the contract of employment or another contractual document, the employee’s signature is obtained to signify acceptance of the terms and there is adequate consideration.
- The non-compete covenant must be “reasonable”.
When assessing whether a non-compete covenant is “reasonable”, consider each situation on its own facts. Some factors to consider include (a) the duration of the restraint; (b) the length of the notice period; (c) whether the employee had access to confidential information and the extent of their exposure; (d) whether a less onerous covenant, such as a non-dealing clause, could achieve the same purpose; and (e) whether the non-compete covenant is drafted in a way that prevents an employee from working for a business which competes with the part of the business that the employee was involved with.
- Watch out for any warning signs that might indicate an employee has breached or is about to act in breach of the non-compete covenant.
An employer should remember that technology is a double-edged sword. On the one hand, a departing employee might use technology to their advantage by, for example, keeping communications on their personal devices or using their personal email address to communicate with a competitor. On the other hand, advances in technology mean that an employee often leaves a digital footprint in, for example, WhatsApp messages, emails, telephone records and printing logs.
- Consider whether the employee has changed their pattern of behaviour.
Whilst over cautious monitoring of employees is likely to erode trust and culture, it can be useful for an employer to pay attention if it notices changes to an employee’s pattern of behaviour. For example, has the employee – after a long period of service – suddenly asked for a copy of their contract of employment? If they have, it might indicate the employee is planning to review the departure provisions in their contract of employment. An employer might also want to keep an eye on whether there has there been a sudden spike in the employee’s printing activity, or whether the employee has made a change to their social media profile which points towards them starting a competing business or joining a competitor.
- Preserve any evidence
If the employee has threatened to act in breach or has already acted in breach of a non-compete covenant, an employer should take steps to collate and preserve any evidence and then decide on a strategy. Any document destruction policies should be stopped, the relevant individuals in the business should be informed that documents should be preserved and steps should be taken to ensure that any evidence of wrongdoing by an employee, such as text messages of emails, are retained. If an employee has been using a work mobile phone to communicate, an employer could consider seeking the assistance of a forensic IT expert to image the mobile phone so that the evidence is not intentionally or inadvertently deleted.
- If an employer applies for an interim injunction, time is of the essence.
If undertakings from an employee are not secured or are not appropriate in the circumstances, an employer could consider applying to the court for urgent injunctive relief. An interim injunction is a temporary remedy that “holds the ring” until the matter can be considered fully at an expedited hearing (a speedy trial). An employer might also consider utilising other tools in its armoury, such as making an application for pre-action disclosure.
- Consider the time and expense of pursuing the departing employee
Lots of factors go into the decision-making balance when deciding to pursue an ex-employee. A business will need to consider how damaging the departing employee is going to be to the business if they go and work for a competitor or start their own business in breach of the non-compete covenant. A business will need to consider whether it is worth the management time and expense, and potential reputational impact, of pursuing the departing employee. If the risk to the business following a breach is low, an employer might be minded to not pursue the employee. On the other hand, an employer might want to take action against the departing employee to send a strong message to existing employees or competitors that the employer will take breach of its covenants very seriously.
- Consider whether it is worth paying an employee for any period of restraint.
An employer might want to consider including a clause in the contract of employment that states an employee will be paid for the period of restraint. An advantage of this approach is that an employee might be less inclined to act in breach of a non-compete covenant if they know they are going to be paid for the period they are prevented from working for a competitor. On the other hand, it might make no difference to the employee that they are being paid and they may choose to act in breach in any event. It is worth considering that the recent case of Planon Limited v Gilligan [2022] EWCA Civ 642 touched upon the issue of payment to employees and financial hardship during a non-compete period, and thus may open the door to employers to argue that the non-compete covenant is “reasonable” if an employee is paid for the duration of restraint.
If you have any questions relating to this topic or would like more information, please contact Shiv Raja or Catriona Watt
