Striking a balance when protecting a business from employees
When preparing restrictive covenants to protect a business from competition from former employees, the question of balance is always vitally important.
The restrictions need to be tight enough to ensure protection but not so tight that the courts might rule them to be unenforceable.
A recent case before the High Court highlighted the balancing act required. It involved a firm of insurance brokers that wanted to ensure that staff did not defect to rival businesses.
Its employment contracts contained restrictive covenants that were to remain in force for 13 months after an employee resigned. The covenants prevented employees from working for a competitor in any capacity and from soliciting its clients.
Three staff then resigned within a month of each other and challenged the covenants as being too wide to be enforceable.
The court accepted that a 13-month period was longer than usual but agreed there was a good reason for it. Professional indemnity insurances were renewed annually. The firm therefore needed 13 months to prevent competition for one renewal cycle.
The objective was to restrain employees from exploiting a relationship that they had built up with customers. It was not excessive and so was enforceable.
However, the court held that the other clause preventing staff joining a competitor “in any capacity” was too wide to be acceptable. It would stop people working in departments that were not in competition with their former firm and there was no justification for that.
The employees were prepared to offer undertakings that they would not break the non-competition clauses that were enforceable so there was no need for the judge to make an order.
The case highlights the principle that restrictive covenants have to be reasonable and provide no more protection than required to prevent unfair competition.
Please contact Jackie Cuneen if you would like more information about the issues raised in this article or any aspect of protecting your business.