Restrictive Covenants – even law firms don’t get it right

A restrictive covenant seeks to tie your hands after leaving an employer.

It’s always interesting when law firms are involved in employment cases.

A law firm has recently been refused an injunction against a solicitor who had recently left their employment. The solicitor had resigned, giving 3 months’ notice.  The firm accepted her resignation and behaved as you’d expect when a team member is leaving: her line manager told the managing partner, the firm recruited a replacement, told her she wasn’t to take on any new matters during her notice period, arranged a handover of clients between the solicitor and her replacement, arranged leaving events, put banners around her desk, and so on.

There was no indication that anything was amiss until the penultimate day of her employment, when the firm suddenly seemed to remember that her contract included a clause that supposedly prohibited her from resigning in the first 3 years of her employment under that contract.  As well as alleging that she had enticed a couple of clients to go with her, purely on the basis that they had instructed her at her new firm, the law firm also alleged that she couldn’t leave their employment, because she wasn’t entitled to resign.

She joined another firm – which it was agreed was not a competitor. Her former employer applied for an injunction to stop her enticing anyone who was a customer of theirs – which would have included customers she hadn’t acted for and those she couldn’t be aware were customers of her old firm.  The firm also wanted the restraint to last for just over two years after she joined her new employer.

It’s important to remember that in an injunction application the Court doesn’t fully evaluate the parties’ positions and whether they’d win in a full hearing. To issue an injunction, the Court just has to determine that there is a serious issue to be heard at a full trial, that damages won’t put things right, even if the employer won a full trial, and that the “balance of convenience” points towards issuing an injunction.

What does “balance of convenience” mean?  Basically, the Court weighs up a number of factors, and decides whether on balance those factors point for or against issuing an injunction, given that that’s a pretty hefty imposition on someone’s activities.  In this case, the fact that the employer was asking for longer protection than the restrictive covenants in the contract gave it, and had delayed in saying anything until the day before the solicitor left, went against it and the injunction was refused.

However, whilst the Court ultimately concluded there wasn’t enough reason to issue an injunction, that isn’t quite the same as saying that the solicitor hadn’t done anything wrong.

That said, and to avoid digging into too much legalease, here are some key takeaways:

It’s odd to have a contract clause in a permanent contract that claims to prevent an employee from resigning at all within a given fixed term. We sometimes see such minimum terms where employees who are shareholders/directors in a business have just sold the business – say under a TUPE transfer – and the buyer wants them locked in for a while to keep continuity, and use an earn out period to incentivise the individuals to perform well.  That wasn’t the case here.

Takeaway Whilst job applicants may feel obliged to accept the terms on offer, especially at the junior end, or where you’ve struggled to find a job, that’s not to say that the offer is automatically reasonable for you, in your circumstances – don’t be afraid to get advice!

For employers, if an employee resigns, and you want to draw their attention to their restrictive covenants, check their contract as soon as they resign, so you can plan your response, and take up your position promptly. If you delay, your chances of getting an injunction or showing that you’re entitled to claim damages for any losses you can prove are going to be reduced.

Takeaway put together an action list that is triggered whenever an employee resigns, especially senior/customer facing staff, that includes checking their contractual notice terms and post termination restraints. Remind the employee of their obligations, especially if the contract includes an obligation to show their restraints to the new employer.

Back-tracking to the start of employment, employers should ensure that restrictive covenants are always tailored to the employee in question. Restraints can only go so far as necessary to protect the employer’s legitimate business interests when someone leaves to join a competitor. General or “standard” restraints that you use in everyone’s contracts may not work when you need to trigger them.  Courts will look at restrictive covenants from the perspective of when they were entered into – so it’s a good idea to issue a full new contract when you promote someone, not just a quick letter confirming their new job title.

Takeaway keep your contracts up to date, getting them reviewed and updated every few years. Use different contracts for different jobs and levels of seniority within the business – admin/support staff won’t usually need to have full sets of restrictive covenants, whereas customer facing sales or business development staff who produce the business’s income and build relationships with customers/suppliers/referrers should definitely have enforceable restraints.

Limit the terms of your restrictive covenants to what is most likely to be reasonable for the employee or role in question. For instance, think about how long your customer contracts last for when thinking about how long you want to stop staff soliciting customers.  Think about the definitions of things like “customer” – is it a person or business who’s been a customer within the last 12 months? Or 6 months? Should you prohibit employees from working within a particular geographical area for a period of time?

Takeaway personalising restraints makes them more likely to be enforceable when an employee leaves. It helps apply the employee’s mind to the risks of misbehaving after they leave if they know there’s a greater chance that a Court would uphold the restraints. It also puts the employer in a stronger position – I often find that when it comes down to it, most parties take a pragmatic line with restraints, but if you’re starting from a credible argument that the restraints could be enforced, your closing position is likely to be better for the business than starting from a very strong but clearly unenforceable term.

Certainty is key. It’s better to have longer, more detailed restrictive covenants for senior employees whose departure could cause losses and disruption to the business, than broad, standard restraints.

Takeaway: again, personalised restraints are essential if you want them to be credibly enforceable if the employee leaves to join a competitor.

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