Restrictive Covenants in Employment Contracts

The law provides protection to employers against competitive activities of employees and ex-employees by the use of confidentiality clauses and restrictive covenants in employment contracts.

Confidentiality During Employment

During employment, an employee is under a number of implied obligations to their employer, including an implied duty of confidentiality and implied duties of trust and confidence and good faith. The former means that the employee is under an obligation not to disclose to unauthorised third parties their employer’s confidential information and trade secrets obtained during the course of employment.

However, in cases where employees have access to confidential information, it is always advisable to insert an express confidentiality/non-disclosure clause into the employee’s contract of employment which makes it clear that they must not reveal such information during employment. Such a clause can usefully define the information that the employer classes as confidential. Employers are able to discipline employees for disclosing confidential information during employment and the case will be strengthened where there is an express clause that has been breached. 

Confidentiality After Employment

When an employee leaves employment, they are generally free to use the skills, training and knowledge gained during their employment. However, employers are entitled to protect their information which can properly be classed as a trade secret or information which, while not properly described as a trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret. Unfortunately, there is no generally accepted definition of what information amounts to a trade secret. Essentially, it is likely to constitute information which, if disclosed to a competitor, would be liable to cause significant damage to the employer’s business. Each case will turn on its own facts but it may include: secret manufacturing processes, chemical formulae, designs or special methods of construction, customer lists and confidential price lists. In determining whether information is a trade secret, the court will have regard to the nature of the employment, the nature of the information, whether the employer impressed on the employee the confidentiality of the information and whether the relevant information can easily be isolated from other information which the ex-employee was free to use or disclose.

Employers who wish to protect themselves should ensure that employees are subject to an express post-termination confidentiality/non-disclosure clause preventing disclosure of trade secrets and highly confidential information when employment ends. It is always better to have an express clause than to rely on an implied duty.

Enforcing Confidentiality Clauses

It is normally easier to enforce a restrictive covenant than to enforce an express or implied obligation of confidentiality post-termination of employment. Restrictive covenants give certainty whereas the line between information which is confidential and information which is not is hard to draw. However, if there are no express post-termination restrictive covenants, they cannot be implied and the employer will then have to rely on express/implied obligations of confidentiality.

The courts may enforce confidentiality clauses by the use of injunctions and search orders/orders for delivery up.

Springboard injunction: an injunction may be obtained as a means of protecting the employer against the competitive activities of ex-employees who have wrongfully used confidential information, for example, a customer list obtained during employment. It is used to prevent the ex-employee from taking an unfair advantage of the springboard they have gained by the misuse of the confidential information. Essentially, the ex-employee is not allowed to use information in confidence as a springboard for activities detrimental to the owner of that information. If an injunction is granted, it should not normally extend beyond the period for which the unfair advantage may reasonably be expected to continue.

Search order/delivery-up order: a search order is used in cases where the employer believes that confidential documents or documents containing trade secrets have been taken and the employee will destroy those documents if they become aware of legal proceedings. A delivery-up order orders delivery up of documents or other property belonging to the employer.

Account of profits: the employer could alternatively try to seek an account of profits for breach of confidence i.e. all profits the employee has made due to the breach. There is no requirement to mitigate.

Damages for breach of contract: an employer is entitled to sue an employee who has acted in breach of contract for any direct and actual losses incurred as a result of the breach of confidentiality complained of.

Restrictive Covenants

One of the most effective means of protecting a business from competition is to ensure that employees are bound by enforceable post-termination restrictive covenants. Restrictive covenants in the context of employment contracts are covenants placing restrictions on an employee’s activities once employment has ended. They need to be express: they cannot be implied. Such clauses will only be upheld against the employee to the extent that they are reasonably required for the protection of the employer’s legitimate business interests. A restrictive covenant will not be enforced if its sole purpose is to prevent the employee from competing with their ex-employer or from using the skills, experience and knowledge acquired during their employment. For the covenant to be enforceable, it is essential that three conditions are fulfilled:

  1. It protects a legitimate business interest – an employer has a legitimate interest in (a) its trade secrets and confidential information, (b) its trade/customer connections or goodwill, and (c) protecting the stability of its workforce. There is no requirement to identify the legitimate interest in the covenant itself but where the covenant does identify the legitimate interest, the employer is stuck with having to rely on that interest and cannot rely on a different one.
  2. It is drafted no wider in scope than is reasonably necessary for the protection of that business interest.
  3. It is not otherwise contrary to the public interest.

Employers should make sure that the restrictive covenant actually forms part of the employee’s contract of employment and that the employee is made aware of it before they accept the job. If an employer tries to impose a restrictive covenant unilaterally at a later date (i.e. without the employee’s express consent), this is likely to constitute a fundamental breach of contract enabling the employee to resign and claim constructive dismissal. An employee can generally claim constructive dismissal if they have been employed for two years or more where their employment commenced on or after 6 April 2012, or one year or more where their employment commenced on or before 5 April 2012.

However, it may be possible for an employer to insist on an employee accepting a restrictive covenant when it comes under a competitive threat and then to fairly dismiss the employee on SOSR (some other substantial reason) grounds if they refuse. It will depend on whether the employer acted reasonably or unreasonably in treating that reason as sufficient to dismiss the employee.

Types of Restrictive Covenant

There are four main types of restrictive covenant:

  1. Working for a competitor, or carrying on a competing business on the employee’s own behalf (non-compete covenants).
  2. The soliciting of the employer’s clients or customers (non-solicitation covenants).
  3. Dealing with the employer’s clients or customers (non-dealing covenants).
  4. The soliciting of the employer’s other employees (non-enticement covenants).

 Modes of Restriction

Restrictive covenants may place restrictions on:

  1. Area: covenants of this kind restrict an employee from competing in a geographical area where the employer has legitimate business interests.
  2. Scope: restrictive covenants of this nature must be carefully defined with regard to the business interests of the employer which they seek to protect. So, for example, an employer will not be allowed to enforce a restrictive covenant attempting to prevent a business activity which is wider than the activities the employer’s business would normally be involved in.
  3. Time: restrictive covenants must be reasonable in relation to the length of time for which they restrict competition. A clause not limited in time is likely to be unenforceable.

Non-compete covenants: covenants which restrain employees from working for a rival company, or working for the former employer’s clients or customers, or setting up a rival business in competition, after they have left the employer’s employment are known as non- compete covenants. These are the most difficult to enforce as they are the most restrictive/draconian. The only way such covenants may be acceptable is in a case where the covenant limits the ability of the ex-employee to carry out certain prohibited activities in a specified geographical area for a limited duration of time (usually six months). Sometimes, it may be better to refer to specific named competitors rather than a geographical area. In cases where the employer’s legitimate business interest can be adequately protected by another lesser form of covenant (such as a non-solicitation covenant), the court will not uphold a non-compete covenant. As far as prohibited business activities are concerned, employers should define these as closely as possible. For example, if an employee goes to work for a competitor but in an entirely different role which presents no risk to the employer’s legitimate business interests, they should not be restrained. It is common to limit the area of business to the specific business activities in which the employee was personally involved when working for the employer. The key factors here are therefore: duration, geographic area and prohibited business activity.

Non-solicitation covenants: this type of covenant prevents an employee from soliciting, canvassing or accepting any work from the former employer’s existing customers or clients for a period of time (usually six months). Such a covenant will be enforceable if it is necessary to prevent the employee from using their personal influence over their former employer’s customers or clients, and the knowledge of their requirements, which they acquired during the course of their employment, to entice them away from their former employer. The covenant should preferably only include those customers or clients with whom the employee actually had personal dealings (or specific knowledge of) in a defined time period prior to the termination of their employment (usually 12 months). The key factors here are therefore: duration, definition of the client/customer/supplier and prohibited business activity.

Non-dealing covenants: covenants of this nature prohibit employees from having any dealings with their former employer’s customers or clients for a period of time (usually six months). It prevents ex-employees from responding to customers and clients who approach them unsolicited, as well as restraining ex-employees from dealing with the customers and clients who they approach. Again, the covenant should only include those customers or clients with whom the employee actually had personal dealings (or specific knowledge of) in a defined time period prior to the termination of their employment (usually 12 months). The key factors here are again: duration, definition of the client/customer/supplier and prohibited business activity. A non-dealing covenant is more onerous than a non-solicitation covenant (as it prohibits dealings even if the client approached the ex-employee) and hence is harder to justify – but easier to enforce because they are easier to prove on the facts.

Non-enticement covenants: this type of covenant prevents the ex-employee from enticing away their former employer’s other employees for a period of time (usually six months). However, it should not cover all employees. Such a covenant should specifically refer to the seniority or knowledge and experience of particular employees and ensure that employees who join after termination of the employee’s employment are not covered. The key factors here are therefore: duration, definition of the staff and prohibited business activity.

Breach of Contract and Restrictive Covenants

If an employer dismisses an employee wrongfully (in breach of contract), or otherwise commits a repudiatory breach of contract, normally he will be prevented from enforcing any restrictive covenants in the ex-employee’s contract of employment. To partly deal with this, employers should consider inserting a clause entitling them to terminate the contract by making a payment in lieu of notice where the contract also contains restrictive covenants. However, be aware that a PILON (pay in lieu of notice) clause in the contract will generally make this payment taxable as earnings. If an employee is dismissed for gross misconduct but the misconduct was not gross, this will not only be an unfair dismissal but also a wrongful dismissal, again enabling the employee to get out of the restrictive covenants. Employers therefore need to be particularly careful when dismissing employees for their competitive activities during employment. An employee can generally make a claim for unfair dismissal if they have been employed for two years or more where their employment commenced on or after 6 April 2012, or one year or more where their employment commenced on or before 5 April 2012. The same principle would apply where the employee resigns alleging constructive dismissal on the basis of fundamental breach of contract/breach of the employer’s duty of trust and confidence: some employees may purport to do this to avoid having to be bound by their post-termination restrictive covenants.

Enforcement and Remedies

Injunction: an interlocutory or interim prohibitory injunction may be used as a temporary order restraining the employee from acting in contravention of their contract of employment, pending the full trial of the action. In this case, the employer would have to provide evidence to support the allegation that the employee is or is about to act in breach of their post-termination covenants. It is only in exceptional circumstances that an ex parte injunction (i.e. without notice to the other side) will be granted. Normally, an injunction is sought on notice to the other side. There is generally no need for the employer to prove damage/loss (except in exceptional cases). The court will decide whether, as a matter of discretion, an injunction should be granted. For example, they will look at the amount of time left to run on the covenant, any delay in enforcement (and the reasons for it), the likely utility of an injunction and whether the employer could be adequately compensated by readily calculated damages or an account of profits.

Damages: the employer is entitled to sue an employee who has acted in breach of contract for any direct losses incurred as a result of the breach complained of. The financial loss to the employer’s business must be quantifiable. Since it is often difficult to prove that a victim of unlawful competition has suffered financial loss, damages calculated on the traditional compensatory basis may be nominal.

Account of profits: the employer could alternatively try to seek an account of profits for breach of confidentiality or fiduciary duty i.e. all profits the employee has made due to the breach. There is no requirement to mitigate.

Claims against the new employer: an employer whose ex-employee has disclosed or is threatening to disclose confidential information to a competitor, or who has entered or is threatening to enter the employment of that competitor in breach of a restrictive covenant, may be able to bring a claim against the competitor himself, even though the competitor was not a party to the original contract.

Please note that proceedings in relation to the enforcement or breach of restrictive covenants must be brought in the County or High Court and not in the Employment Tribunal. This is because most disputes in relation to the enforcement or breach of such covenants fall outside the jurisdiction of the Employment Tribunal.

Restrictive covenants and Garden Leave

An employer may restrict or deny an employee who has resigned and is working out their notice period access to confidential information and/or customers, suppliers and clients by placing the employee on ‘garden leave’. A garden leave clause has the effect of requiring an employee to serve their period of notice at home. During the period of garden leave, the employee would be entitled to their full salary and benefits, while at the same time they must not work for anyone else and they continue to owe obligations of good faith and confidentiality. The aim of the employer in imposing garden leave is to maintain the employee’s fidelity whilst at the same time ensuring the employee does not maintain his contacts with the employer’s customers, suppliers, clients and confidential information. For garden leave to be enforced, there must be an express clause included in the employee’s contract of employment. Otherwise, putting an employee on garden leave could be in repudiatory breach of the right to work – and may invalidate any restrictive covenants.

Settlement Agreements and Compromise Agreements – What you need to know

A Settlement Agreement can be used to end a worker’s employment amicably in a way that avoids disadvantaging either the employer or the employee. It was introduced in the UK in July 2013 and took the place of the old Compromise Agreement. The two are quite similar in that both are legally binding and usually entail the employee receiving a financial settlement and an agreed form of reference. From the employer’s perspective these agreements allow them to terminate the worker’s employment without worrying about facing a tribunal.

The key difference between a Settlement Agreement and a Compromise Agreement is that the latter provided a limited degree of protection in some respects. This was because, while the principle of “without prejudice” applied it only did so to pre-termination discussions relating to existing employment disputes. Without prejudice is a legal principle preventing discussions from being brought up in court. It helps to facilitate open discussion without either party worrying their words being used against them later in court. A weakness of the Compromise Agreement was that only existing disputes were covered, which tended either to hamper discussions between employers and employees or to cause issues later in tribunals.

The Settlement Agreement introduced the concept of “confidential” pre-termination discussions, which prevents talks from being used as evidence in unfair dismissal claims, even in cases where an existing dispute does not exist. However, it should be noted that confidentiality does not apply in all cases. If an employee is fired for an unfair reason, such as whistleblowing, trade union membership or asserting their statutory rights as a result of entering into a Settlement Agreement, then the circumstances can be brought up at tribunal. Also excluded are cases brought under discrimination, harassment, victimisation or breach of contract. In addition, if a tribunal considers that improper behaviour by one of the parties has taken place it might also allow the previous discussions to be heard at tribunal. Examples of improper behaviour would include bullying and intimidation, physical assault or putting undue pressure on a party, such as pressurising an employee to make a decision on an offer. ACAS, the employment conciliation body, recommends that employees be given 10 calendar days to consider offers, unless the parties mutually decide to fast-track discussions.

In order to be legally binding the Settlement Agreement must satisfy certain conditions. Details of the specific complaint or proceedings must be included and the document must state that applicable statutory conditions have been met. If all relevant parts are not included the agreement will not be valid – further information about the parts that must be included in the Settlement Agreement can be found here. Where an employee is a senior member of the company, such as a director, shareholder or office holder, a Settlement Agreement – Director should be used. This contains additional clauses dealing with directorships, shareholdings and bonus/commission payments together with confidentiality and restrictive covenants.

Jobseekers’ Work Programme Does not Help Disadvantaged People

MPs on the Work and Pensions Committee expressed their concerns about the government’s Work Programme aiming to find job for people who could not find one for a year or more. According to them the new scheme for getting jobless people back to work does not work property mainly for those at the greatest disadvantage.

The committee announced it had serious doubts about the fact that the programme was improving, mentioning the fact that homeless people, disabled people and such with alcohol, drug and other problems were in fact being ignored and no one was eager to provide them with an employment contract.

When the scheme was launched in June 2011 it showed a really low success rate. Critics opposed to it when they found out that it missed the government’s 5.5% target as it was revealed that only 3.5% of those being part of the programme found jobs for six months or more. Most of them have filled in a Job Application form.

The main aim of the scheme is to propose to its clients such positions at which they could remain for significant amounts of time.

It cannot be hidden that the latest data point out that the outcomes have improved for the majority of the people but disadvantaged jobseekers cannot say the same thing.

What worries most of the people now is the fact that job providers would give job to those with biggest chances to find one and will not care enough for the rest who are really in need.

Dame Anne Begg, who chairs the Work and Pensions Committee, commented: “It is clear that the differential pricing structure is not a panacea for tackling creaming and parking. The Government must do more to ensure that the Work Programme provides effective support for all jobseekers, not just the ones who are easiest to help.”

 

The Universal Credit Benefits System is Now Being Tested

The new universal credit benefits system is now being tested in Greater Manchester. Many new legal document templates will be presented to the customers not only in Manchester, but to those from all over England.

Working people(those who have an employment contract) and those seeking work(who need a job application form) will not pay multiple separate benefit payments and tax credit but a single payout.

The scheme will start functioning across the whole country in October.

The expected results from the overhaul are simpler welfare system and assurance that people would be able to move off benefits and into work easily.

Work and pensions secretary Iain Duncan Smith said: “What we have to do is to start changing people, and that’s what this system is about.

“It’s about trying to help those who are the most vulnerable to get ready for the world of work, and that will improve their lives dramatically.”

Many people shared they were concerned because not everyone had access to the internet.

Others mentioned the fact that in most of the cases such complex computer systems are not as reliable as expected so things could go wrong.

Shadow work and pensions secretary Liam Byrne said he liked the idea but according to him it was late for such a scheme and it was over budget.

However, unions criticized the government strongly as it did not focus on creating more jobs but ‘demonising’ people who are out of work.

The Public and Commercial Services (PCS) union would stage a protest in Ashton-under-Lyne.

PCS general secretary Mark Serwotka said: “If Universal Credit was being introduced to genuinely make life easier for people entitled to benefits it would be commendable, but the Government’s pernicious language exposes its real intent is to demonise and punish them.”

 

 

Disabled People Lose The fight for the Independent Living Fund

Five disabled people tried to appeal in court against the decision of the government to abolish the Independent Living Fund (ILF) but unfortunately they lost.

What they pretended for was that the consultation process had to be declared “unlawful”, which had to lead to the proposed axing of the £320m fund.

The government does not care that 19,000 people now receive money from ILF and plans to scrap it in 2015.

The average pay these people receive now is about £300 a week.

However, on Wednesday, the consultation process was announced lawful.

The fears of claimants were that disabled people would be trapped at home because of the fund’s closure. Unfortunately these people rely too much on this funding, as they are not always capable of signing an employment contract.

There was a hearing in March where no clear reasons were given so that the fund to be closed and the information given about the differences between the fund and local authority assessment and provision was not quite detailed.

Not long ago the Department for Work and Pensions stated that there had to be a single system administered by local authorities so that there was more control.

The ILF exists since 1988 but in 2010 the government announced it could no longer keep running the scheme outside the mainstream social care system.

Soon after this the fund was closed for new applicants.

Gabriel Pepper who is one of the five applicants has accused the government of imposing “appalling cuts” which were “a vicious attack on the disabled”.

Disabled people shared that they needed those money in order to hire personal assistants helping them with their everyday needs and to be able to go out and have normal social life.

Richard Hawkes, chief executive of the disability charity Scope, said:

“Not getting the support to wash, dress and leave your home is unacceptable.”

 

UK Unemployment Rises

The Office for National Statistics (ONS) announced that between December and February the unemployment in the UK has risen up to 2.56 million. Many people have been made redundant, hopefully their employers had a redundancy policy.

Those who claimed Jobseeker’s Allowance last month were 1.53 million which means 7,000 less than before. There is no reliable data on how many employment contracts have been signed up for the same period.

Another thing ONS stated was that average earnings in the year to February mark the lowest growth rate since 2009.

In the latest quarter of February the number of people in work fell to just under 30 million.

Statistics also showed that 900,000 people have been out of work for more than a year and that the number of 16-24-year-olds with no job rose by 20,000 to 979,000

The data point a 62,000 fall in the number of people in part-time jobs and an increase by 60,000 in full-time employment.

Alan Clarke, economist at Scotia bank, said: “It’s not a disaster, but a lot of the froth and really good news we had over the last year on jobs is becoming exhausted, which shouldn’t be a surprise when there is not much growth around.”

Employment minister Mark Hoban said they would not stop helping jobseekers.

The number of JA claimers in whole England, Wales and Scotland has fallen having in mind that the number of new claims was at its lowest level for more than four years.

The number of young people claiming JA is down by 2,800 on the month, and is 65,400 lower than last year.

As usually there are many people criticizing the decision of the UK government. These claim that the government has to think over reining back its austerity plan.

Paul Kenny, general secretary of the GMB union, said: “The chancellor should heed IMF advice to change course to grow the economy to end this needless waste of human talent.”

 

New Benefit Reform Under Question

According to a recent report by think tank Resolution Foundation, people working on a part-time employment contract and also people who are unable to secure a full-time job, will potentially lose their right for benefits. Statistics show that there are about 1.4 million people in the UK who have only part-time jobs. The reforms will target those adults who cannot find a full-time job. About 1.2 out of the 1.4 million will have to provide evidence that they deserve to keep their right for benefits.

The Department of Work and Pensions has targeted part-time workers in order to push them to find a full-time job. By removing the benefits entitled to those workers, the Department aims to force them into full-time employment so that they can make a difference not only for themselves but also for the community as well. Part-time workers will be thus encourages to get additional hours at their present jobs, to look for another job, or to seek a higher wage.

The reforms announced are also part of the government’s recent plan for introducing a new benefits system called Universal Credit. The Universal Credit plan will combine several existing benefit systems in one. Some of them include, but are not limited to, income-base Jobseeker’s Allowance, Child Tax Credits and Housing Benefits. Ministers strongly believe that the existing benefit system is costly and outdated and thus needs to be replaced with a new one. The Universal Credit plan is said to replace the current system and to be implemented in October 2013.

Despite the positive sides that the government sees in the reform, there are also concerns whether or not it will actually work in practice. According to the Resolution Foundation, if the reform is put into practice, it might be really difficult for the job centers to cope with additional 1.2 million people. Many other organizations also expressed concerns about the new reforms and system and questioned its implementation. One of the concerns is that it will not be possible for the claimants to take extra hours at work or even find another job. With 1.2 million people the odds of finding a second part-time job, or even a full-time employment, are close to impossible. There are also even bigger concerns regarding the currently weak labor market and the fact that people are willing to work more hours but there is no opportunity to do that. As good as the reform may sound; it is actually questionable whether or not claimants will be able to function in this context.

It was reported that in the past month about 74 charities, councils and other organizations had submitted written papers of evidence revealing all the concerns and questions they had about the new benefit system and how hard it will be to implement and put into practice. Some of the issues discussed in those papers concerned risks of paying benefits to one household member and whether the IT infrastructure as well as staff will be ready in time.