Can small business owners enforce restrictive covenants?

  1. Restrictive convenants for employees
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    Employment Law Clinic

    Employment Law Clinic UKBF Big Shot Full Member - Verified Business

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    UK Business Forums members have long had a febrile love-hate relationship with employees asking for advice, some arguing whether giving this advice could be helpful to employers too, while others view any help for employees to be a direct betrayal to the SME’s we aspire to support; the trend recently seems to be to accept and assist employees, although the flavour might change in time.

    One topic that often arises among employee questions is about restrictive covenants – whether and how an employer can restrict the activities of an employee after they’ve left employment. It arises with employers too, but then with more confidence that their terms are great, entirely enforceable, that they can handcuff their ex-employee to a radiator rather than see them working for a competitor.

    And, this is one of the favourite topics that armchair lawyers are happy to offer an opinion on too – the terms, beyond five miles or beyond six months, or in the same industry, or possessing the knowledge an employee has from the experience of their employment, are always too restrictive and could never be enforced.

    But this simply isn’t true. Ever.

    The fact is, restrictive covenants can be traced back to at least the 19th century and may still be applicable today – at least if the defendant was alive.

    Restrictive covenants can apply as far and wide as global. And for a lifetime. And in anything associated with the industry. And making any use of the knowledge they gained as part of their employment.

    This might be rare, but it’s not unheard of.

    It is not often unreasonable to say that a local hair stylist can’t work for a competitor down the road for a while after leaving your employment. Customers can be loyal to a stylist, rather than a salon, and the business has the right to protect its interests when the salon brought the customer in. Six months to a year might be reasonable, as taking the stylist off the local circuit for that long should encourage customers to decide where they go.

    Will a restrictive covenant stand up in court?

    Restrictive covenants are actually notoriously difficult animals to handle and there is no fixed rule that any of us can use to say ‘this will stand up in court’ or ‘this isn’t enforceable’.

    Professionals that draft the terms will likely advance the proviso that this should be adequate, but only when a clause is tested in the gladiatorial arena of a court can we ever really know – each instance stands alone, so even if the terms worked for a similar client, they won’t necessarily work for the next.

    The restrictions alone – the details that are often posted and commented on in threads – are not adequate to make a judgment about whether these could stand up in a court.

    Pay and other terms are influential too: an employee on a minimum wage doesn’t enter into a contract as willingly as someone offered a lengthy contract, long notice period, great pension and being well reimbursed.

    There is a case in, from memory, the shipping industry in the late 19th century that was upheld in the high court (it’s buried in the pages of an old law book, but there are interesting examples of feudal-era rights being conveyed to modern property owners, for example). The employee was restricted from working in the industry for their lifetime, anywhere in the world – a lot wider than a five-mile radius or for six months. It’s extremely restrictive, but their specialist skills were duly rewarded during their employment and that was enough to allow the restrictive covenant to be upheld long after the employment ended, and there are other similar cases, although copies of judgments were not typically placed online back then.

    The examples of restrictive covenants we see on here are varied, some very reasonable and probably enforceable, others so badly worded or broad that they probably have no chance of being enforced – largely DIY efforts.

    But let’s be realistic. The best written restrictive covenants would be upheld in court, while the worse would simply be rejected by any reasonable lawyer asked to get the hopeless enforced.

    And, most importantly, the typical hair salon, SEO company or other SME is simply not going to have the money to enforce a restrictive covenant, regardless of how well it’s drafted – it’s not cheap to file a complaint in the high court. I’ve defended employers that have been told their staff have a restrictive covenant, but never seen a case from an SME go to court – I believe the costs are typically quoted at more than £25k, often well beyond the practical benefits of enforcement.

    Like other things, such as an employee leaving without notice (an employer can recover the damages and costs for such a breach of contract), it’s often not cost-effective or practical to try to enforce legally-sound terms.

    Instead, if you have concerns of this nature, raise it as an issue you want to have covered in your instructions – for bespoke terms, rather than template contracts – and terms can be drafted that will at least discourage behaviour you don’t favour after, or even the timing of when, an employee leaves. No guarantees, but a lot cheaper and more practical – and restrictive covenants never offer guarantees until endorsed by the courts.

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  2. Talay

    Talay UKBF Big Shot Free Member

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    My thoughts are that the costs of enforcement should be far more affordable so that a business can protect itself should an employee wish to set up in direct competition or work for a competitor, seeking in either case to take existing clients with them.
     
    Posted: Mar 22, 2017 By: Talay Member since: Mar 12, 2012
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  3. Mr D

    Mr D UKBF Big Shot Free Member

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    I've been on the receiving end of a restriction. Luckily enough my skillset was useful in different types of employment or business so was able to manage until some of the terms ran out. Court action was cheap enough, businesses are not all tiny ones.
     
    Posted: Mar 24, 2017 By: Mr D Member since: Feb 12, 2017
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  4. Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

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    I understand this is common and 'just how it is', but I have to ask: How just is this? I mean, from the perspective of free enterprise? Where do these covenants end and the free market begin?

    The New York Times noted two years ago that these things were popping up in a wide array of jobs now.

    As per The Times: "Noncompete clauses are now appearing in far-ranging fields beyond the worlds of technology, sales and corporations with tightly held secrets, where the curbs have traditionally been used. From event planners to chefs to investment fund managers to yoga instructors, employees are increasingly required to sign agreements that prohibit them from working for a company’s rivals."

    Isn't there a risk benefitting an individual company but damaging the wider industry because surely this will damage innovation? And is it any coincidence that California is a hotbed of innovation since in that state courts pretty much blanketly refuse to enforce non-compete clauses? Intel, for instance, wouldn't exist if it wasn't for this freedom to compete.

    I'm happy to be persuaded otherwise here - but on the surface these non-compete clauses to be an unfair restraint on trade that are literal leftovers from the 15th century.
     
    Posted: Mar 27, 2017 By: Francois Badenhorst Member since: Aug 25, 2015
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  5. Michael Loveridge

    Michael Loveridge UKBF Newcomer Free Member

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    The estimate of £25k is way over the top, unless you insist on using a top City firm, and even then it's probably too high unless it goes to a full hearing. Most small to medium firms of litigation lawyers could deal with such a case for far less than that.

    In practice probably 90% of such cases never get to trial anyway, as if the employer does issue court proceedings the employee usually backs down. And it's important to bear in mind that if the employer wins at trial the employee would usually be ordered to pay the employer's legal costs as well as having to pay his own lawyers - a sort of double or quits - so the employee would have to be extremely confident of success to take that risk.

    Covenants like this, if properly drafted, do offer an employer a high degree of protection, and they should take no notice of scaremongering warnings like this of incurring £25k in costs. Just speak to a couple of local litigation forms and get an estimate - you may be pleasantly surprised.
     
    Posted: Aug 23, 2017 By: Michael Loveridge Member since: Aug 2, 2013
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