In the August print issue of Professional Security magazine it was letters of intent; this time Claudia Gerrard takes us through restrictive covenants in the security industry and points out where you could come a cropper. Claudia Gerrard is a Legal Consultant working for Excello Law and she specialises in law relating to the security, leasing and parking industries
Like most industries, the security industry relies upon clients, customers, contacts and prospects as a source of business. Combined with that sales staff, account managers and other customer facing staff 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 in deciding the time period of the restriction. So, a covenant cannot last for an indefinite period of time. Even where a time period, such as six or 12 months, this might be inappropriate if there is no legitimate business interest to be protected.
Similarly, any geographical area which applies must be reasonable. This is often relevant where a business operates within a particular area. And there is a risk posed by an ex-employee working in the same area. However, such clauses are not always enforceable. It might be legitimate, for example, to restrict an employee from working within a short distance of your offices. But if they are home-based, for example, this might be inappropriate and make the clause unenforceable. Also you need to impose the right level of restriction, bearing in mind the employee’s role and status within the company. For example, office based admin staff might be less of a threat than an account manager who has frequent, regular contact with clients.
In terms of both clients and prospects, it may be difficult to enforce a covenant where the client or prospect came to the business because of a personal connection or the personal qualities of the ex-employee. A large number of legal cases have arisen on the wording of restrictive covenants. Although earlier cases are used to reach a decision, each case is decided on its own facts, giving rise to uncertainty on whether or not a covenant will be valid. Ultimately, therefore, what the cases do show is that this complex legal area is fraught with potential dangers.
Restrictive covenants: Ten Tips
1) Consider whether there 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, 12 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.
