The phrase ‘it’s just business’ doesn’t cut it if your previous company has a restrictive covenant. Ignoring such a clause to help a rival or to even go into competition against your old employer could leave you with hefty legal costs, so find out where you stand.
Restrictive covenants is a term we are all likely to be familiar with. Every business has information it considers invaluable to its success. Restricting the use of this information by employees after their employment has ended may be vital to its protection. An employee who has knowledge of technology, strategic information or key customers could be an attractive asset to a competitor.
A restrictive covenant is typically a clause in a contract which prohibits an employee from “competing” against their ex-employer for a certain period after they have left the business, or prevents them from soliciting customers (and employees) of the business using the knowledge they gained during their prior employment.
Given the restriction applies after a notice period has expired (say, 90 days), a six-month non-compete could mean an employee having to avoid working with certain key customers for nine months, or risk being in breach of contract. In cases of breach, employers can either apply to the court for an injunction to prevent or stop the individual from what they are doing, and/or pursue a claim against the individual for damages and/or account of profits.
If the ex-employer can convince a court the covenant is designed to protect legitimate business interests, and that it extends no further than is reasonably necessary to protect those interests, then there is a strong chance a case will be upheld and enforced.
Where clauses are specific as to what companies former employees are prohibited to work for, or which customers/employees are prohibited to solicit, and seen to be sensible in the duration of any restrictions, the more likely a court is to consider the non-compete as reasonable and enforceable.
So, if an employer is successful in its claim for breach of contract, how does the court quantify the damage they have suffered?
In a recent case (Morris – Garner and another v One Step Limited) the Supreme Court found the defendants breached covenants by setting up a business in competition with the company. The court believed the loss was quantifiable in its normal means – for example, by way of loss of profit.
It’s good to talk – before you go
The amount of damages is still to be assessed, but considering it was estimated in the Supreme Court that the loss the company had suffered by way of reduced sales was in the region of £3.4m to £4.6m, it will be interesting to see how much has to be paid.
As an individual subject to restrictions in a defined period post-employment, a proactive discussion with your employer about what they expect of you is the only effective way to minimise your non-compete. You need to show you have sought clarity as to who are defined as customers. If the employer refuses to be specific, there have been cases defended on the basis it is impossible to know.
But this should not detract from the fact employers with a “legitimate business interest” can enforce a non-compete and have every right to pursue a breach of post-employment contractual obligations.
Anyone who knows that they have a restrictive covenant likely to be enforced should be mindful that, even where the prospective employer confirms that they would give financial support to the employee with legal costs involved in defending, these are costs of the employee and will be taxable as a benefit in kind.
Peter Gwilliam is the owner of Virtus Search