Tuesday, May 7, 2019
As published by The Sunday Business Post, May 5th 2019.
The first step to creating a restrictive covenant that will hold up in court is to ensure you actually need one.
One of the most difficult issues in employment law is also one of the most relevant for employers. That’s the question of whether it’s possible to exert any control over an employee’s actions after they leave employment – and in particular stop them competing with the business or stealing clients and customers.
In employment law, these are generally referred to as “restrictive covenants” – and as the name suggests, are clauses inserted into employment contracts that purport to restrict the employee from doing certain things after they leave.
Typically, restrictive covenants fall into two categories:-
It’s very easy to understand why these kind of restrictions are attractive to an employer. Customers, clients and contacts are the life blood of any business. A situation in which an employee leaves employment to go and work for a direct competitor can be immensely frustrating particularly so if key customers or clients move with them.
Being able to stop a former employee from competing with you at all is a pleasant prospect, particularly when it’s a senior member of management that leaves.
These restrictions are generally included in employment contracts, particularly where the employee is a senior member of management or otherwise high up in the hierarchy.
The question, however, is whether or not the courts are prepared to enforce them. The answer is “possibly”.
Generally speaking, the terms and conditions contained in an employment contract will be enforceable – that is the point of recording certain points in writing in the form of a binding contract after all. However, there are occasions on which other factors come in to play. In the case of restrictive covenants, the courts have refused to uphold restrictions on occasion. There are typically two reasons for this.
First of all, all Irish citizens have the constitutional right to earn a livelihood. If a restriction impinges upon that right – prevents an employee from earning a livelihood, or is likely to – there is a chance that the courts will be unwilling to uphold the restriction in question.
This scenario is more likely to arise in the case of non-compete clauses. This is because prohibiting an employee from working for a competitor at all could theoretically prevent an employee from earning a livelihood. A lot depends on the nature of the role and the extent to which an employee can actually earn a livelihood without being in direct competition with their former employer.
As well as the constitutional provisions, an aspect of competition law can also be relevant. Restrictive covenants can sometimes be considered to be in “restraint of trade”; by depriving the employee of the ability to compete with the former employer, trade can be affected. The obvious intention of a restrictive covenant is to achieve this (if only for a period of time) meaning restrictive covenants can fall foul of compeition law on these grounds too.
An employer is simply never going to be able to rely upon an open-ended non-competition clause which is disproportionately restrictive. An employer will generally be able to rely upon a non-solicitation clause (because there’s less scope to either prevent the employee from working or impede competition).
Ideally, an employer would ask themselves a series of questions before including restrictive covenants in an employment contract.
First of all, an employer should ask themselves if they need to impose restrictive covenants at all, having regard to the employee’s position, seniority or duties. Thinking about it in practical terms, do you actually need to try to prevent an employee competing with you after employment is over?
Equally, will the employee actually have contact with key customers/clients to such a degree that they might be able to steal them?
If the answer to both questions is yes, an employer should only really proceed with a non-compete clause if they are able to tailor that clause to the actual needs of the business. The courts are more likely to uphold a clause where it is precise and appropriately defined in terms of (a) duration, (b) geography and (c) products/services to be protected.
In other words, employers should act intelligently – there is no point prohibiting an employee from competing with you in respect of all of your product lines if, realistically, the employee is only a threat in respect of a particular aspect of your business. A court is likely to react badly to the fact that you took sledgehammers to crack nuts, in other words.