The ‘Great Resignation’, relating to the post-pandemic term of employees voluntarily leaving their jobs en masse, has resulted in a quarter of the UK workforce actively seeking to change employers in 2021. Businesses face serious challenges as former employees move to competitors, potentially damaging their business and taking important contacts and confidential information with them. It is important that employers are able to rely on the terms and restrictions set out in their employment contracts in the event that departing employees seek to misuse a business advantage.
One size does not fit all
Every organisation has the right to protect its business interests such as its intellectual property, trade secrets, customer and client information, accounting information and the stability of its workforce. Restrictive covenants can be a valid way to protect legitimate business interests (for example, an employer’s connections with clients, suppliers or customers and its own workforce) provided they go no further than is reasonably necessary. Factors which influence whether such clauses will be enforceable include, among others, the activity prohibited, the length of the restriction, the geographic extent of the restriction, and the nature of the business and the nature of the employee’s role. Whether restrictions are usual in the sector will also be an important consideration.
Effective and enforceable restrictive covenants are paramount for any organisation, so avoiding a ‘one size fits all’ approach is key. Employers must tailor covenants for each employee, reflecting the employee’s level of seniority or exposure to business-critical information. The validity of a restrictive covenant will be assessed at the time it is entered into, not in light of what may happen during the course of employment, so where employees are promoted, it’s important that their employment contracts are reviewed and updated to ensure that appropriate protection is in place for the business.
The High Court decision in Quilter v Falconer, in which a senior executive joined a competitor during her notice period, highlighted the importance of tailoring restrictive covenants, and also served as a reminder to employers to consider shorter, more limited restrictions during an employee’s probation period, especially when the notice entitlement is reduced.
All change for non-compete covenants
Non-compete restrictions have been at the forefront of public debate in recent years, partly due to the UK government’s post-Covid strategy which seeks to reform the clauses to prioritise innovation, something that restrictive covenants arguably stifle. The efforts of the government with regards to reform perhaps signify a change in the future use of restrictive covenants in the UK.
A government consultation closed on 26 February 2021 and a formal response is awaited. The consultation draws on international examples, notably the ban on post-termination non-compete clauses that is recognised within Californian employment law, notably home to some of the world’s ‘most innovative organisations and tech clusters’. The consultation also explores the option of compensating employees for compliance with post-termination restrictions, an approach adopted by European counterparts to ensure enforceability. These potential reforms are aimed at focussing minds by ensuring that employers only use restrictive covenants where necessary.
Protecting your business interests
While we await further direction on any potential reform, employers are faced with the challenge of protecting their business from the actions of departing employees during the Great Resignation. Employers must take a risk-based approach when dealing with a worker who is leaving the business, ensuring that the individual is not exposed to more confidential information, or to key clients or contacts, during any notice or garden leave period.
Key to protecting a business will be having key clauses within the employment contract such as the right to place employees on garden leave, the requirement to return all company property, and for employees to irretrievably delete any confidential information, plus well-drafted intellectual property and confidentiality clauses and enforceable restrictive covenants.
Rena Magdani is a partner and national head of employment, pensions and immigration at Freeths LLP