The Coronavirus pandemic and furlough has been cited as a key driver in the Scottish job market being at a record high. Most of us will know someone who has, upon a period of self- reflection, decided to leave their pre-pandemic role and leap to pastures new in the past 12 months.
Our practice has seen a sharp rise in instructions from businesses and employees, particularly in relation to restrictive covenants within employment contracts. Most employees, when confronted with the small- print of their employment contract, revert to us with the well- rehearsed “I thought restrictive covenants were unenforceable?” “Not so fast”, is our invariable response.
What is a Restrictive Covenant?
A restrictive covenant is simply an obligation imposed on a party to an agreement preventing said party from doing something. Restrictive covenants often feature in share- purchase agreements, finance agreements and even consumer contracts.
Of course, amongst the most common restrictive covenants are those found in employment contracts.
Such restrictions may seek to prevent an employee from working for a competitor or it may be a prohibition on the use of private & confidential company data.
Modern employment contracts, particularly in the services industry, include an array of restraints and often include a prohibition on the solicitation of company clients.
Are Restrictive Covenants Enforceable?
It depends. Each case will turn on its own facts and circumstances.
Restrictions on working for a competitor
At some point in most people’s careers, they will leave their current role to take up employment in a very similar role at a competitor business. Those who do so should be wary of this category of restrictive covenant within their employment contract.
Such a restriction may well be enforceable in the event that the employer can show that the restraint is reasonable. In assessing reasonableness, a court may consider, amongst other matters, the length of the restraint, the geographical area to which the restraint applies, the type of role undertaken by the employee, the seniority of the employee and the employee’s exposure to “company secrets”.
So, the court will deal with restraints applicable to a senior director of a specialist services company entirely differently to those incumbent upon a junior team member of a large multi- national logistics firm. A 12 month restriction in a niche sect of the recruitment industry may well be found to be entirely reasonable, but a 3 month restriction for a skilled barista could be held as wholly unreasonable. The court has been known to find “world-wide” restrictions enforceable but also refuse to enforce restrictions spanning a mere 5 miles.
In short, employees and employers alike should be wary of “non- compete” restrictions as enforceability very much depends on each individual circumstance.
The point in time at which the restrictions are judged is the time they were entered into, regardless of the circumstances prevailing at the time a business is seeking to enforce them.
Restrictions on Solicitation of Customers
It is common for employers to attempt to prevent their employees from “taking customers with them” when moving firm. Such restrictions will often prevent former employees from contacting customers and will perhaps capture prospective customers within its ambit.
Once again, should a court be assigned the task of determining enforceability, it will do so with a keen eye on “reasonableness.” All material facts and circumstances will be taken into account but none with more scrutiny than the length of time the restriction is in place for and the customers against whom the restriction applies.
It is unlikely that a court would be persuaded that junior team members with little decision- making authority cannot be contacted in any event, but the court’s position can change in the circumstances.
Take, for example, the accountancy world. A dim view will perhaps be taken of restrictions preventing all contact with junior fee- earners at the “Big Four” but “age and stage” might be less of a negative influence when it comes to a smaller start- up firm with fewer personnel between the junior ranks and Partners.
Once again, each “non- solicitation” clause should be carefully considered and assessed on the facts of its circumstance.
The golden rule is that it will not be enforceable if the restriction goes further than what is necessary to protect the employer’s legitimate interests.
Private & Confidential Information
The first thing to note under this heading is that there are duties implied into every contract of employment which include the duty not to disclose company secrets. Thus, theft and distribution of a company mailing list would be a grievous breach of contract and can be robustly prevented.
Employers often seek further protection post- employment by way of restrictive covenant, however.
The courts are, generally, more accepting of such clauses, providing that there is no unreasonable restriction on trade. It is generally accepted that companies have their trade secrets and they are entitled to keep them.
That being said, there are limits. A prize-winning mixologist might be properly prevented from sharing the secret recipe of a bar’s famous gin cocktail, but will not be prevented from showing off his hard- learned and unique shaking technique at his new west- end enterprise. A motor-car engineer might be prevented from sharing how his previous employer’s new roadster model has such unique air- conditioning capabilities, but will not be prevented from applying the same laws of physics towards his new employer’s SUV suspension capabilities.
What Happens on Breach?
A company with a reasonable and supported apprehension that a former employee is in breach of a restrictive covenant may apply to the court for an order of interdict. An interdict is a formal court order preventing a person or business from doing something. The consequences of a breach of an interdict are severe and can culminate to quasi- criminal court proceedings.
Employers may also apply for an “interim” interdict- often before an employee has even had the chance to respond to the claim made against them. Practically speaking, an interim interdict can sometimes stop an employee from working for the entirety of the court case.
In severe cases, an employee can ask the court to grant an award of damages in the event that it can prove monetary loss as a consequence of an employee’s breach. Worse, still, if the employee’s new employer knew or assisted in the breach, the previous employer can demand an “accounting for profits” against the new employer.
- Restrictive covenants can be enforceable;
- The enforceability of a restrictive covenant will be considered on its own facts and circumstances;
- Common restrictive covenants in employment contracts include “non- compete clauses,” “non- solicitation clauses” and restrictions in relation to private & confidential business information;
- Employees owe duties of loyalty and fidelity to their employers during the course of employment;
- An employer may obtain an interdict against former employees in breach of enforceable restrictive covenants;
- In some cases, an employer can obtain an interim interdict against former employees without giving the employee the opportunity to respond or make representations at court;
If your business requires advice surrounding departing employees and the enforceability of restrictive covenants within your employment contracts; or if you are an employee facing enforcement action, the Dispute Resolution team at Aberdein Considine are on hand to assist you with expert advice.
The team, headed by Euan McSherry and Ross Webb, have recent and strong experience advising on the enforcement of restrictive covenants in Scotland’s Sheriff Courts and the Court of Session.
If your business is considering imposing restrictive covenants, bespoke drafting is key. The Employment Team at Aberdein Considine can assist in drafting suitable restrictions.
Aberdein Considine are recommended by the Legal 500 for Commercial Litigation, Insolvency and Debt Recovery.