How to stop ex-employees pinching your customers
It is a common concern when an employee leaves a business that they will take customers away with them. It is possible to include a clause called a ‘restrictive covenant’ in an employee’s contract of employment to stop this happening (or at least provide an employer with a remedy if it does happen). However, this is a complicated area of law and careful thought needs to be given to what the clause says and it needs to be given to the employee at the right time.
This article sets out what a restrictive covenant is and what it can do. It also looks at the limitations on restrictive covenants and gives some guidance on when an employer should ask employees to sign restrictive covenants.
What is a restrictive covenant and what can it do?
A restrictive covenant is a clause in an employee’s contract of employment which restricts what they can do after their employment has ended. Restrictive covenants usually cover some or all of the following:
- A non-competition clause: This clause will stop an employee going to work for a competitor or setting up a rival business.
- A non-solicitation clause: This clause does allow an employee to work for a competitor but it stops them approaching their former employer’s customers for their new business.
- A non-dealing clause: This clause goes one step further than the non-solicitation clause and stops an ex-employee accepting business from a former customer even if the customer has approached them.
- A non-poaching of employees clause. This clause stops an ex-employee coming back and recruiting their former colleagues for a competitor or new enterprise.
So far so good. However the courts take any attempt to restrict a person’s ability to work very seriously so there are some major limitations on how much an employer can restrict an ex-employee.
The limitations on restrictive covenants.
Many employers would love to stop ex-employees working in a competing business or poaching customers from them forever. Unfortunately, from an employer’s point of view, that is not possible. A restrictive covenant will only work if it is no wider than is necessary to protect the legitimate business interests of the employer. This requirement is why the law in this area can become complicated. Much court time is spent arguing over whether or not a restriction is too wide.
The first thing an employer needs to do is identify the legitimate interest it is seeking to protect. The only legitimate business interests the law lets you protect are:
- Trade connections (e.g. the relationships the business and its employees have with customers); and
- Trade secrets and confidential information.
If an employer tries to impose a restrictive covenant on an employee who doesn’t have access to customers (e.g. because they work in the back office) or trade secrets/ confidential information then the covenant will not be trying to protect a legitimate business interest and won’t work, i.e. the courts won’t enforce it and it won’t stop the employee pinching customers. This scenario may not concern an employer too much because after all, the employee would not have the relationships or the information to harm the employer’s business.
The second thing an employer needs to do when drawing up a restrictive covenant is to make sure it is no wider than is necessary to protect the business interest identified at the first stage. In practical terms this means that the restriction imposed on the employee should:
- Be for a limited time only depending largely on how long it will take for someone else in the business to establish relationships with the customers the departing employee dealt with. More than 12 months is rarely justified and a shorter period is preferable.
- Only apply in a limited geographical area; For example if a business has all its customers in Skipton a nationwide or worldwide restriction would be too wide to protect that business.
- For a non-solicitation or non-dealing clause, be limited to the customers the employee actually dealt with. If the clause just referred to all the customers of the business this would be too wide as it would stop the employee dealing with customers of their former employer they did not know or deal with.
When should an employer think about restrictive covenants?
An employer should think about restrictive covenants at the start of employment when an employee is first recruited. This is because a restrictive covenant should be in the employee’s contract of employment and this should ideally be given to the employee before their employment commences. At this stage the employee has little option but to agree because if they don’t sign the contract they don’t get the job. It is possible to ask employees who have been employed for sometime to sign new contracts including restrictive covenants and if the employee agrees the covenants will be enforceable. A problem arises when an employee refuses to sign. It is possible in the right circumstances to impose a restrictive covenant on an employee who refuses to sign but it is a complicated process that carries some risk so it is best avoided. It is far too late to try to impose a covenant when you suspect an employee is about to leave or when they have handed their notice in (although if an employee is leaving in circumstances where you are paying them some money and they are signing a settlement agreement it might be possible to negotiate and include a restrictive covenant in the settlement agreement).
In summary, if you want to stop ex-employees pinching your customers you need to plan ahead and draw up a contract of employment that includes a restrictive covenant which is limited in scope and make sure that you ask the employees to sign it at the start of their employment. You also need to review employee’s contracts regularly to make sure they still fit the employee’s circumstances.
This article is intended as a general guide only for detailed advice on your specific circumstances please contact Simon Blake at Walker Foster Solicitors on 01756 700200 or [email protected].