Restrictive Covenants – are you sure you are protected?LexLeyton
The impact of Covid-19 on UK industry has been, on the whole, awful. We are entering a recession which will likely take years to recover from. Household names to small start-ups have gone the business equivalent of five rounds with Mike Tyson. The bad news is that this bout looks like it may go the distance.
How tired are we all of coronavirus?
Increasingly I find myself seeking solace in silver linings. The increased time with family, renewed sense of community and green shoots of recovery in the business world are encouraging. As an advocate of honest, authentic conversation, it has also been heartening to see many owners, managers and HR professionals approach difficult conversations with candour and compassion.
Sadly for some of these businesses, reducing staff numbers is essential for the survival of the company, and other people’s jobs.
Where these staff are prohibited from joining competitors, working within particular areas or divulging confidential information, often there exists the potential for dispute. Employers are traditionally wary of departing staff breaching restrictive covenants, sometimes resulting in bridges being burnt purely on fear of what could happen. This is even harder to swallow when we consider that, as a general rule, such covenants are difficult to successfully enforce anyway, especially when not carefully constructed.
The fundamental principle when it comes to restrictive covenants remains that they will be unenforceable unless they go no further than is necessary to protect the employer’s highly confidential information, business connections and/or workplace stability.
The Supreme Court did look at this issue last year in the landmark case of Tillman v Egon Zehnder. The Court adopted the ‘blue pencil test’ which encompassed two elements in ensuring a covenant went no further than was absolutely necessary to protect the business.
(i) are there words in the covenant capable of being removed without the need to add to or modify the remainder; and
(ii) will the removal of the words majorly change the overall character of the contract.
This test allows a Court to remove a small number of words, but not to add any or change any. The overall character and intention of the covenant cannot be altered; merely tightened.
No amount of lead in the court’s blue pencil will be enough to save a restriction that’s obviously too broad – for example where it seeks to prevent an ex-employee from any involvement in any capacity in the employer’s industry for an unreasonably long period.
This note of caution is reflected in the judgment itself: “The courts must continue to adopt a cautious approach to the severance of post-employment restraints“. Interestingly, the Supreme Court also warned that employers should not necessarily expect to recover their costs (or all of them) where they win in these kinds of cases, but only because the court has removed parts of covenants which might have been more tailored in the first place. As they put it in relation to the issue of costs: “there may be a sting in the tail“.
So what and why is this so important now? At a time when very sadly so many employers are having to let employees go, they should consider carefully how their restrictions have been crafted. Where employees are departing under a settlement agreement, for example, it is possible to re-design any restrictive covenant to increase the likelihood of it being enforceable. At a time where intangible assets may be more crucial than ever, ensuring that you have done what is necessary to protect your business’ IP should be a key feature on the check list when dealing with departing employees.
If a free consultation around any of the issues raised here or about any aspect of HR and employment law impacting your business would help, please don’t hesitate to reach out to us at https://lexleyton.co.uk/free-consultation/