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Legal


Laying down the law Claudia Gerrard


Many organisations try to control ex-employees via restrictive covenants, but, as Claudia Gerrard explains, this is complex legal area and fraught with potential dangers


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ike most industries, the rail industry relies upon clients, customers, contacts and prospects as a source of business. Combined with that, sales staff, account managers and other customer-facing employees often play a crucial role in developing business. Many organisations try to protect their business by controlling what ex- employees can do after an employment contract has ended. However, it is often the case that such restrictive covenants, as they are called, may fall foul of the law. This is because an ex-employee is entitled to earn a living and restrictive covenants might prevent them from doing so. From that starting point, it is easy to see why covenants cause such complex issues. They have to meet the needs of an individual as well as the business interests of a company.


Restrictive covenants can fall into a variety of different categories. It will depend upon the industry, the ex- employee’s position and the form of data which needs to be protected. The main point is that they most protect the legitimate business interests of the business. They can’t be used on a whim or without reasonable justification. On that basis, a covenant could prevent non-solicitation of clients or customers. This means the ex-employee cannot actively try to take your customers or clients. Correctly worded, such a covenant would probably be enforceable, subject to a few caveats. Alternatively, or in addition, a covenant can prevent canvassing of clients or customers. This could prevent the ex-employee from approaching clients or customers with a view to soliciting business from them. Such a clause is not always enforceable, particularly if the ex- employee had no knowledge or contact with prospects.


As mentioned, there are caveats to enforceability. For example, the wider the restriction, the less likely that it will be enforceable. Care must be exercised


Restrictive covenants: top ten tips


1. Consider whether a restrictive covenant is necessary Avoid a common tendency to use a covenant when it is not absolutely necessary. Courts will take a dim view of meaningless covenants which don’t protect legitimate business interests.


2. Look at the legitimate business interests to be protected Give careful thought to which business interests need to be protected, with emphasis on how much time, effort and money is needed to acquire clients or prospects.


3. Consider the possible risks to the business Assess what the risks might arise if an employee leaves the company, both in terms of confidential information and use of customer details.


4. Impose a geographical area to be protected A covenant can specify the geographical area which applies. The smaller the area of restriction, the more likely that it will be enforceable.


5. Limit how long the clause will last The covenant should be restricted in terms of time. Open-ended covenants could be unenforceable, so six months or, in extreme cases, twelve months should be stipulated.


6. Define customers to be protected Where possible, include any customers or prospects whose details should be protected as part of the covenant. This can be updated from time to time, if there are any new clients or prospects.


7. Consider whether it is reasonable to include prospects It is harder to claim protection where prospects are concerned and including prospects may make the entire covenant unenforceable.


8. Protect databases Thought should be given to whether the contents of any database needs to be protected. This could include contacts, clients, customers, suppliers and prospects.


9. Use garden leave where appropriate Garden leave may be an opportunity to protect any data but consider whether any period of garden leave should be deducted from the overall length of the restrictive covenant.


10. Include post-termination clauses in employment contracts Do not rely on the common law. It is important to have specific, well drafted clauses covering post- termination obligations. If in doubt, seek advice.


June 2013 Page 35


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