It can be very difficult to manage senior staff deciding to jump ship to another company. It usually requires a co-ordinated effort across the organization to ensure they step off smoothly without rocking the boat and disturbing the running of the business, especially if resignations are announced suddenly.
A particular concern can be when they decide to join competitor companies, which can often be unavoidable in niche markets.
What steps could an employer take to protect the interests of their business when this situation arises?
Garden leave clauses can be useful to ensure the leaver does not have further access to business information, clients and staff whilst also preventing them temporarily from working for a competitor.
Garden leave clauses would usually need to be included expressly in a contract of employment, stating that once the employee hands in their notice they may be asked to not come into the workplace during their notice period. During this notice period they are still paid a salary and remain bound by the terms of the contract of employment, which usually includes express or implied duties to act in the interests of the business and to not disclose confidential information to third parties. This means that any useful information which they may have to pass onto their new employers, who may be competitors, could become outdated by the time the notice period ends. Further, any relationships they have with clients, customers or staff could be disrupted.
- It is common for employers to insert restrictive covenants into the contract of employment. These covenants restrict the exiting employee who agrees to the contract from performing certain actions. The most prevalent forms of these covenants include:
- Non-poaching, where ex-employees are restricted from taking other employees with them when they leave;
- Non-soliciting, which prevents ex-employees from actively pursuing the business of customers and clients of the company;
- Non-dealing, which prevents ex-employees from conducting business with customers and clients of their old employer at all,regardless of whether the ex-employee approaches the customer or vice versa; and
- Non-competition, which prevents employees from joining competitors or setting up as a competitor for a specified period.
When drafting restrictive covenants, employers need to be careful in ensuring:
- That the covenants protect a ‘legitimate business interest’; and
That the protection sought is no more than is reasonable having regards to the interests of all involved parties and public interest.
Therefore covenants cannot be unreasonable, or excessively burdensome, on the exiting employee. Different business interests that need protecting will justify different levels of restriction. In assessing whether a certain level of restriction is justified, the Tribunal can take into account the circumstances of the case, for example how high-level the employee is and how much their leaving affects the stability of the business. Generally speaking, the more restrictive the covenant, the more hesitant the Tribunal would be to enforce it. The key question to consider is whether the employer’s business interest can be protected effectively using less severe measures.
With exception to clauses concerning confidentiality, all restrictive covenants must only be enforced for a specific period of time. The longer the period of enforcement, the more significant the business interest would need to be to justify the period of restriction as reasonable. As above, the Tribunal will take into account circumstances, for example how long it would take the employee replacing the ex-employee to ‘settle in’ with the company’s clients and customers.
Employers can also insert ‘geographical’ restrictive covenants, which prevent ex-employees from working within the vicinity of the company by defining a certain radius in which the ex-employee cannot work. This will generally only be considered reasonable when there is a business interest that has a strong connection to ‘local loyalty’, or a client base characterised by their locality.
In order to be reasonable, employers should tailor restrictive covenants for leaving employees on a case-by-case basis. What may be a reasonable restrictive covenant for one employee, may not be reasonable when applied to another, so generic covenants drafted to apply to all cases are not a good idea.