Restrictive covenants: protecting the most valuable assets of a business

When a crucial employee or team leaves a business for a competitor, it can be enough to cause real difficulties for the business. Restrictive covenants can be used to protect the organisation’s most important assets: its clients, candidates, and staff.

The impact of team moves on any organisation can be disastrous. Often, it’s a senior employee leaving to join a competitor, who takes members of their existing team with them. Businesses in distress are particularly vulnerable to such departures, as their personnel are likely to feel less secure and, therefore, more willing to leave.

There are even instances where whole teams have conspired to leave to join a competitor. For example, we acted on a case where the senior management team of a subsidiary business, including its CEO, contrived to transition key customers, suppliers, and employees to a new company that had been set up with their employer’s main competitor. Had they been successful, it would have certainly prompted the distress, and ultimately the liquidation, of that business.

Senior staff resignations don’t have to be distressing. Every company should compile, and regularly update, their risk registers and mitigation strategies for such eventualities. Restrictive covenants are also a simple way of ensuring staff changes are managed proactively.

How do restrictive covenants work?

Restrictive covenants can be used to restrict what an employee can do in competition with their former employer after they have left the business. There are numerous types of restrictive covenant, such as those that prevent a former employee from engaging in a competing business for up to 12 months following their departure, or those that stop the solicitation of key customers and/ or suppliers for a similar period. In order to be enforceable, restrictive covenants must do no more than what is reasonably necessary to protect a business interest; they must therefore always be drafted and updated carefully.

In relation to team moves, the most significant restrictive covenants are those that prohibit the solicitation of existing employees. While they cannot prevent employees from leaving to join a competitor of their own volition, they can prevent the ex-employee from encouraging their former colleagues to follow them. For example, a senior manager subject to restrictive covenants would be unable to solicit certain employees from their previous employer for a limited period – ideally those with whom the individual had direct contact or management responsibilities.

If an individual breaks their restrictive covenants, then they would face legal action, as would their new employer if they were aware of the covenants and encouraged the breach.

What to do in practice?

Before taking any action, it is important to determine the full extent of the problem; any steps taken prior to ascertaining all the facts could limit your options later on. Investigate whether any other covenants have been breached or if any confidential information has been taken by the exiting employee(s).

Once you know the extent of the problem there are many remedies available to prevent breaches of enforceable covenants depending on the evidence of wrongdoing obtained. For example, without notice injunctions make an individual liable to contempt of court and imprisonment for further breaches. In cases also involving the theft of confidential information, a search order could be obtained. This would allow your legal team to enter and search the individual’s premises – or even those of your competitor – for evidence of stolen data. In our experience, successful search orders are swiftly followed by settlement discussions.

Resignations are distressing, particularly in the current trading conditions, but there are many options available to help employers. For further information on the use of restrictive covenants, or a free traffic light review of any existing covenants, please contact Neil Warner or Kate Canning.