Enforce restrictive employment covenant

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Enforce restrictive employment covenant

We advised a specialist products business if the restrictive covenants in employment contracts were sufficient.  They needed to protect their business when their sales boss joined a competitor.  The sales boss endeavoured to entice key employees and customers to join him.  Our challenge was to quickly find a solution before our client’s business was damaged.  

Strength of evidence

We acted quickly, before customers joined the competitor. We:

  • Reviewed employment contracts and advised our client whether the restrictive convenants were enforceable in the High Court.
  • Analysed the evidence that clients would be enticed to leave and join the competitor;
  • Provided candid advice that the evidence was weak.

So, we sought other means to protect our client’s business. Our solution was to:

  • Find a method to lock in existing employees and prevent a team move;
  • Sought an undertaking from the former sales boss re-stating the restrictive convenants;
  • Sent a warning-off letter to the competitor regarding the implications and costs it would face upon inducing the sales boss to breach his employment restrictions during the restrictive period.

The competitor did not approach our client’s key customers for four months. This gave our client time to recruit a new sales director and build stronger relationships with its customers. In detail, we provided the following advice:

Restrictive covenants: employment contract

The restrictive covenants prevented former employees soliciting customers and poaching staff. Unfortunately, the wording was old and not particularly helpful. However, we advised the restrictions may be enforceable because:

  • Of the seniority of the sales boss. Generally, covenants signed by senior employees have a better chance of enforcement than those signed by junior employees;
  • He had not brought the customers with him when he joined the business.

In turn, the sales boss claimed he had been excluded from key decisions relating to sales. This could set up a breach of contract claim making the restrictive covenants unenforceable.  We advised this claim had little chance of success.

Existing employees: lock-in

We helped our clients’ managers communicate to employees about:

  • The dangers of breaching employment terms;
  • The risk of being sued;
  • Not receiving a reference.

The client was also implementing a share incentive plan.  We advised that our client should invite employees at risk of being solicited to join the share incentive plan.  This invitation was:

  • A good indication they were valued,
  • A benefit the competitor could match;
  • Did not cause an immediate cash flow issue.

Our share incentive plan included claw-back provisions relating to restrictions on future activities. These were similar to the non-compete provisions found in the employment agreements. We were careful not to create a penalty clause.

Injunction: Solicitation of customers

An injunction to prevent the former employee contacting customers would not succeed, because our client:

  • Lacked evidence that the former employee had approached customers, and  evidence is critical.
  • Had not built direct relationships with customers handled by the former employee,  preferring to leave this to the sales boss.
  • Lacked evidence that the sales boss had used his employer’s IT system to communicate his new job. However, in many cases ex-employees are not so careful.

Hence we advised that a strongly worded warning letter sent to the competitor, plus undertakings from the sales boss, would protect our client because of fear of legal action.