Are you protected if a key employee leaves?

Your colleagues will change jobs and employers. This is a fact of life. But when a key employee or stakeholder departs they take with them relationships and confidential knowledge highly valuable to your competitors. This is a particular risk in today's competitive recruitment market where there is demand for top talent.

A mitigating strategy is to ensure your employment and service contracts protect your business with tailored post-termination restrictive covenants.

Getting it right

Post-termination restrictive covenants control what an employee can, or better put, can't, do after their contract has been terminated. For example, covenants can prevent a departing employee from poaching key clients or colleagues, or can prevent an employee from working for a competitor or setting up a competing business.

Well-drafted restrictive covenants can be effective. For example, after a claim by her former employer, the High Court recently enforced a non-compete covenant in a senior solicitor's service agreement. The solicitor had taken a senior role at a local competitor on the basis she would build a practice in direct competition with her former employer and targeting her former employer's key clients. The judge accepted the covenant was in her service agreement to guard against this very situation and therefore prevented her from taking on her new role for 12 months from the termination of her previous employment.

However, care is needed when drafting covenants. Organisations may be tempted to draft very broad covenants to give the widest possible protection. But this is actually the entirely wrong approach to take. The courts will reject covenants that are unnecessarily or unreasonably burdensome, particularly in an employment context; there is more scope for wider restrictions when they relate to shareholders or directors. Among other considerations, covenants must be reasonable, no wider than necessary and designed to protect a legitimate business interest. Typically, covenants must therefore be limited in scope – for example to a period of time, a particular type of activity, or geographical area (or all of these). The range of possible restrictions can vary significantly in different industries, locations, and seniority of the staff member.

Employers must also be mindful of their conduct prior to and during the termination process if they intend to enforce post-termination restrictive covenants.  For example, if an employee is wrongfully dismissed (such as without proper notice) or constructively dismissed (where an employer's behaviour amounts to a breach of contract, enabling the employee to treat themselves as dismissed) then covenants may not be effective.

Other contractual protections to consider

There are other ways you can use your employment or service contracts to mitigate the impact of key staff departures. For example:

Notice: Almost all employment contracts will require an employee (and the employer) to give a period of notice if they want to bring the employment to an end. If one of your employees gives notice, is their contractual notice period long enough to enable you to manage their departure and recruit someone new? You can always agree to a shorter notice period if the employee requests and that is appropriate when the time comes but you are very unlikely to be able to agree a longer notice period.

Garden Leave: An employment or service contract can contain a specific provision which entitles the employer to ask the employee not to carry out any work or meet with contacts or clients during their notice period. There are pros and cons to putting an employee on garden leave. For example, any time spent on garden leave reduces the length of any restrictive covenants, and an employer is still required to pay the employee their full salary during this period without receiving any benefit of their services in return, however, it can be a useful tool which allows other members of staff to build relationships with key contacts without interference from the departing employee. Just because a contract contains a garden leave provision, it doesn't mean it needs to be implemented though, so by including one in the contract at the outset of the relationship an employer has the option to invoke it when the relationship ends.

Confidentiality: A key employee is likely to have access to confidential information which is potentially commercially valuable to competitors. Confidentiality terms should be written into key staff contracts that control use of confidential information both during and after employment. Furthermore, the employee should be reminded of these restrictions when they hand their notice in, as well as their post-termination restrictions, and asked to re-confirm that they agree to abide by them.

Repayments: Often you will have invested significant sums of money in training key employees. This investment is lost if they leave soon after this training. If you have paid for an employee to undertake training or a qualification (such as professional qualification or MBA), you could ask employees to sign a funding agreement including an obligation on the employee to repay training costs if they leave. Again, what you ask for must be reasonable and reflective of your loss (rather than an attempt to punish or unfairly penalise the employee for leaving). A common approach is reducing the amount repayable as time passes after the training.

Managing a bad break up

For more acrimonious or controversial departures, you may consider a settlement agreement, which is a separate contract where an employee waives legal claims against their employer in return for a payment of money or some other benefit.

A settlement agreement is an opportunity to set out clearly the basis on which a key employee is to leave your organisation and can include restrictive covenants as well as detailed provisions to ensure a smooth exit and transition out of the business. Normally the employee receives a sum of money in return for complying with the terms of the agreement, so is incentivised to behave well.  

Varying contracts in practice

If you want to introduce new contractual controls on key employees or stakeholders, you must update or vary employment contracts in the right way. Otherwise, these updates may not be binding on your employees.  

Generally contracts cannot be varied unilaterally, so both parties must agree to the changes. You will also need fresh consideration (you will need to give the employee something in return for agreeing to the new or updated covenant). Some employees may be happy with something nominal like an extra day of holiday, but if you are trying to impose more stringent restrictions, employees may require a more substantial incentive such as a pay rise. Review or promotion processes can therefore be a good time to consider contract variations, especially in so far as restrictive covenants as they must be tailored to the level of seniority of the employee. However, contract variations can be a complex area so please do get in touch to discuss strategy and approach if you are considering making a change.

Next steps

We regularly review key employee and stakeholder contracts and can give you a succinct and actionable view on whether you would be protected in the event of a key member of staff departing, or if you have a new member of staff joining the business and want to know whether or not their existing restrictions are enforceable. This latter point is particularly important as a new employer can be joined to proceedings against an employee if it is considered to have encouraged an employee to breach its restrictions.

Please also let us know if you have a live issue.  Perhaps you have an employee leaving and you want to enforce covenants, or you are a senior employee and want to know if your own employment covenants are likely to be binding if you leave. Our employment disputes team is here to help.