Why employers should audit restrictive covenant clauses

With more staff expected to move jobs post pandemic, now is a good time to review and improve contractual post-termination restrictions, says Esther Langdon

Staff attrition is a fact of business, and there are steps that firms can take to protect their position now. In conjunction with assessing flight risk, a good first step is to audit and stress test current protections. Would the business be protected if a key senior manager went to a competitor and asked his team to go too? Or if they left and approached a prospective client you were just about to clinch a deal with?

In doing this stress test, it is important to have in mind how important contractual restrictions are. Clients are often alarmed by just how limited the protection is which is implied into contracts of employment after termination. This only really protects trade secrets and does not stop competition or approaches to clients. 

Other considerations businesses should bear in mind include:

  • Does the restriction protect a legitimate interest?
     
  • Does it go no wider than reasonably necessary?

  • How can the employer show that the particular restrictive covenant is reasonable? (This burden falls on the employer, not the employee.) 

  • Does the restriction work for the individual employee? A blanket approach will not work. Instead, the employer needs to think through what level of protection is reasonably necessary in each case, taking into account issues like varying levels of influence over customers and varying knowledge of confidential information.

  • Have the restrictions become stale? An area where employers can be caught out is that the reasonableness of the restrictions must be judged at the time they were entered into, not at the time they might come to be tested. Any changes of circumstances, such as promotions, change of role, business sales or TUPE transfers, may call for fresh restrictions.

  • Are the documents signed or properly executed?

In auditing the restrictions, the range of relevant documents should be dug out. Post-termination restrictions are most commonly found in employment contracts and service agreements, but also in non-disclosure agreements, confidentiality deeds and staff handbooks. 

Employees who hold shares or options, or participate in other incentive schemes, may also be restrained in their future activities in the plan documents. Members of LLPs and shareholders may also be restricted under the terms of LLP and shareholder agreements. 

The documents must then be assessed as a whole. This involves not just scrutinising the post-termination restrictions themselves, but also other contractual provisions such as confidentiality and intellectual property, garden leave, payment in lieu of notice, return of company property and prohibitions on the employee using the employer’s name after the employment has terminated. 

If the audit reveals some gaps in the business’ protection, the next step is to consider how best to address them – not only from the legal perspective, but also the strategic one. 

There are various options here, which can include taking the opportunity to update and harmonise contracts across the business, agreeing separate and updated restrictions with key individuals or tying any settlement offer into updated restrictions. 

Employers will need a careful game plan which builds on employee engagement, avoids making concessions that restrictions are not enforceable and also ensures that any extension or variation of restrictions is enforceable and backed up by valid consideration. 

Proactive employers who look into these issues now should reap the rewards of presenting a confident approach to protecting their business. 

Esther Langdon is an employment lawyer in the London office of international law firm, Vedder Price