The existence and extent of any restrictive covenants are critical to consider at an early stage in the recruitment process. Failure to do so can have severe financial consequences for both the employer and the candidate and can even require the recruitment process to be stopped altogether. So what are restrictive covenants and why are they so important?
What are Restrictive Covenants?
Restrictive covenants are used by employers to prevent employees competing with them after the end of their employment. They most often take one of the following three forms:
- A clause banning the employee from working for a competing business (Non-compete covenant).
- A clause prohibiting the employee from seeking work from or doing work for the employer’s clients (Non-solicitation/Non-deal covenant). l
- A clause preventing the employee from seeking to recruit or working with employees of the employer (Non-poach covenant).
Many contracts will contain all three of these restrictions. In a recruitment context a clause banning an employee from working for a competing business can be particularly important but recruiters should also be wary of employees from the recruiting company seeking to recruit employees from their old employer as they may have a covenant preventing this.
Are they enforceable?
There is a commonly held belief that restrictive covenants are not enforceable. This is not correct. Restrictive covenants are enforceable insofar as they are necessary to protect a legitimate business interest. The relevant legitimate interests are:
- Confidential Information
- Client connection
- Stability of the workforce
Provided that the covenant is directed towards protecting one of these interests it should be viewed as potentially enforceable. For example, if an employee deals with clients regularly, their employer will have an interest in this client connection which they could protect by a non-solicitation/non deal covenant or potentially a non-compete covenant. Conversely it would be difficult to justify a covenant limiting client contact for someone who has no dealings with clients or confidential information about them.
What remedies are there for breaching a covenant?
In order to understand why it is crucial to consider restrictive covenants at an early stage in the recruitment process it is useful to understand what can happen if covenants are breached.
The primary remedy for a breach of a restrictive covenant is an interim injunction. An interim injunction is a court order requiring the ex-employee to comply with their restrictive covenants until the matter can be resolved at a full hearing or the covenants expire. Most cases never reach a full hearing. As the interim injunction is granted before the main hearing the employer only needs to show that it is arguable the restrictive covenant is enforceable, which is a low bar.
If there is a non-competition covenant the effect of the injunction will be to prevent a new employer from employing a candidate at all, until the injunction is over. In practice, this can mean that the candidate is no longer suitable and a new candidate must be found.
Injunction proceedings can cost in the tens of thousands of pounds in legal fees and can render the recruitment process void. They should always be avoided if possible and certainly should not come as a surprise.
What needs to be established?
It is important to find out about any potentially relevant covenants at an early stage in the recruitment process. Candidates should be asked about any restrictive covenants before being put forward for roles. Individuals in the recruiting company may also have covenants preventing them from poaching employees from a previous employer and so this possibility should also be explored.
Having established what restrictive covenants the relevant parties have, the next stage is to assess the potential risks posed by the covenants. A non-compete covenant is obviously of critical importance if a candidate is looking to move to a competing business. A nonsolicitation/non deal covenant can be equally important if a company is hoping to leverage off a candidate’s client connections.
Is the covenant likely to be enforced?
Once it is established that there are relevant covenants, the next question to consider is how likely it is that the covenants will be enforced. Enforcement is only likely if the employment of the candidate is likely to materially damage the business of their ex-employer. Enforcing restrictive covenants is expensive and it is unlikely that a company will take action against an ex-employee unless they think their business will be materially damaged. Also, without evidence of such damage it is difficult to succeed with any enforcement action.
For example, a candidate may join a competitor when their covenants prevent this, but the role at the competitor may mean there is no realistic possibility of the candidate impacting on their ex-employer’s business. In this case the covenant is unlikely to be enforced.
Conversely, if the candidate’s actions in their new role are likely to damage their old employer, their old employer is more prone to take action against them and also more likely to succeed with this action. Some industries, such as broking and recruitment, are much more inclined to enforce covenants than others so this is also a relevant factor.
What if there is a relevant covenant?
If there are relevant covenants that are likely to be enforced, the key question is whether or not the recruiting company is willing either to comply with these covenants or to take the risk on recruiting anyway. It may be the company is prepared to wait for a candidate’s covenants to expire or to provide different duties that don’t breach the covenant. Sometimes companies are prepared to take a risk that the covenant won’t be enforced or that a compromise can be reached. What is key is that the recruiting company is concluding the recruitment process in full knowledge of the risks.
Key takeaways
During the recruitment process it essential to remember the following:
- Restrictive covenants can be enforceable.
- All covenants should be considered at an early stage of the recruitment process.
- Any covenants that could impact on recruitment should be raised with all parties.
- The recruitment should only continue if all parties are happy either to comply with the covenants or accept the risks that they pose.
First published in The Global Recruiter
