UK: A Covenant Education

Last Updated: 13 January 2009

Article by The Employment Team

Employees are important in any business, but for some they are crucial to success. There are a number of ways that management can safeguard its assets, human or otherwise.

While employees are important assets for any business, for some businesses they are vital – in effect, they are the business.

Working out how to retain core staff – or ensuring they don't walk off with confidential information, key clients or other team members – is a central task of management. From a legal point of view, what that means in practice is a necessity for a set of contractual obligations, or 'restrictive covenants', circumscribing the rights of staff should they decide to leave. "A robust set of restrictive covenants post-termination is always an extremely good idea for your key employees – particularly for those whose departure could damage the business," says partner Andrea London, head of employment at Rosenblatt.

Restrictive covenants proscribe the period – of up to 12 months – within which employees cannot either compete with their former employer, solicit or deal with business from the company's clients, or poach former colleagues. They also stop employees from exploiting the confidential information of their former employer to further their own interests. London says such restrictions need to be employee-specific and recognise the damage to the business that could be caused by that employee. "A lot of employers don't realise that you can't have one set of 'catch-all' restrictions that are applicable from the MD all the way down to the tea-boy. You should have more onerous restrictions for your CEO and less onerous restrictions for your admin staff, if any, taking into account the business interests you are seeking to protect."

The power of words

According to London, the wording of employee contracts is particularly important during the current period of uncertainty. "Employers seem to be getting increasingly litigious when it comes to protecting their client base, their workforce and their confidential information," she says. "Losses or business damage in the current market would cause them significant problems.

"We have seen a rise in litigation recently and the cases do not appear to be settling so easily. Injunctions and expediated trials are becoming increasingly common."

London recently dealt with a case involving a senior employee who (while on gardening leave) claimed that his notice period was significantly less than his employer believed. He had also apparently recruited several of his colleagues to his new employer. The client was prepared to take the employee to court to secure an injunction to make sure the full notice period was applied – in the end that wasn't necessary. The employee backed down at the door of the court, agreeing 'undertakings' that he would properly comply with his employment contract.

Making an example

Sometimes London's clients – which include large financial institutions and media companies with many high-value staff – are forced to pursue certain individuals to stop wider leakage of staff, clients and confidential information. "I've had clients who have undertaken proceedings because they consider that if they let certain individuals get away with it, others will effectively 'try their luck'. They don't want to set a precedent, so showing such activity is not acceptable, they are likely to preclude other employees trying the same thing in future," she says.

In seeking to prove their cases against former employees, London will work with data forensics experts to look at computers and email systems to see, for instance, if employees have contacted clients about their exit and solicited them, or whether they've worked with future employers on recruiting members of their present team. These days, it is a lot more difficult for people to cover their tracks.

"Even if you think you have completely deleted your hard drive, the chances are the information is still there. Unless you're some kind of IT whiz, and know how to properly delete and cover all of your activities," explains London. "It's very difficult now to make any arrangements to depart, as an individual, let alone with a team, without leaving some kind of electronic evidence."

Without proper contractual clauses in place, however, such evidence will rarely amount to very much. London says her clients are sometimes disappointed at what little they can do to restrict former employees without express contractual post-termination obligations in place. "We still have companies come to us wanting to pursue a former employee for, say, dealing with company clients, but their restrictions are not enforceable and so they don't have much of a basis upon which to prevent it. We sometimes have to advise these clients to mark up their particular situation to experience and put restrictions in place to protect themselves in the future."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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