ARE YOUR BUSINESS INTERESTS PROTECTED?

ARE YOUR BUSINESS INTERESTS PROTECTED?
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Date: 10th Aug 2016

A loyal customer base can be destroyed by an ex-staff member. Here's how you can prevent this happening.


ARE YOUR BUSINESS INTERESTS PROTECTED?

Every business knows that it can take years to build up a loyal customer base but a matter of days for this to be destroyed by an ex-staff member. Here we look a how you can prevent this happening. 

Restrictive Covenants

Normally, a business seeks to protect its goodwill by adding restrictive covenants into staff contracts.These covenants prevent an employee from doing certain actions once the contract has ended, so they live on after termination. Such covenants can also be added into contracts with other business or suppliers; here we deal with those specifically in staff contracts, as these are harder to enforce.

Most businesses are under the impression that if a covenant is in the contract and the ex-staff member breaches that covenant then they will be able to enforce the agreement. However, this is simply not the case.

Enforceability

In order for a restrictive covenant to be enforceable you must show that:

  • You have a legitimate business interest that needs protecting; and
  • The protection is no more than necessary in all the circumstances.

A customer base is more than likely to be a legitimate business interest, as it provides the main income for most businesses. Supplier lists with deals and contacts you have created over the years is also likely to be of significant importance to a business.

When determining if a covenant is necessary a court will consider the reasonableness of it taking into account factors such as; the duration; the geographical area covered; the customers/suppliers it refers to and the seniority of the person who is subject to it. This is not an exhaustive list. Given that the courts will consider each case on its own merit, it is difficult to provide specific advice in this article on each of these points.

The courts are very wary when it comes to enforcing restrictive covenants, as they do not want to restrain trade and prevent a person from being able to earn a living. Therefore, if a clause is drafted too widely, without consideration for the business interest you are seeking to protect, it is unlikely that it will be enforceable.

It should be noted that a court will not amend a clause to make it more reasonable and therefore enforceable; they will simply reject it altogether, leaving you totally unprotected. You therefore need to carefully consider which covenants are required to protect your business interest, and that the scope of those covenants are neither too wide nor too narrow.

Types of Covenants

The main types of restrictive covenants are:

  • Non-solicitation. This prevents a positive act by the staff member of contacting former customers/suppliers, or making an initial approach, with a view to obtaining their business. Merely informing a customer that they are leaving, and even providing their new address, is unlikely to be seen as solicitation.
  • Non-compete. This prevents an employee working for a direct competitor. Such clauses are harder to enforce than non-solicitation clauses, given the courts reluctance to restrain trade.
  • Non-dealing. This prevents an employee dealing with any customer or potential customer of a business. It can also include suppliers.
  • Non-poaching. This prevents a staff member from taking staff with them to a new business. The idea behind this covenant is to ensure a stable workforce.

Our top practical tips:

  • Do not use the same covenants for all levels of staff.

  • When appointing new staff members consider if the covenant is relevant to that person's circumstances.

  • Be able to explain why the covenant is drafted how it is.

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Written By

Laura Pearce
JFH Law
London
020 7388 1658

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