Stopping an Employee Working for a Competitor – Do Restrictive Covenants Really Work

This is an issue that rears its head very regularly. The employer has invested a lot of time and resources in training the employee and providing that employee with experience that ultimately would be attractive to competitors. The general approach to such covenants is that the narrower the restriction the more likely such covenants will bind the employee. To illustrate that point, if the period of the non-compete clause is six months, as opposed to twelve months, and refers only to a competitor in, say, a local town as opposed to the entire State, then it is more likely that the restrictive covenant will bind the employee. That can fairly be described as the general approach of the law, but of course much depends on the facts of each case, and two cases illustrate that point.

In a recent Irish case the judgment does in my view illustrate the difficulties for employers. In that case the employee worked for a telecommunications company and there was clause in the contract that restricted him from working for a competitor for a period of 6 months. He was offered employment by a direct competitor,and gave notice of his resignation to his employer. The employer told the employee that he was prohibited from taking up his role with its competitor for a period of six months, and correspondence ensued between their respective lawyers. Both telecommunications companies reached an agreement which meant that the non-compete clause would be reduced to a period of just over three months. In effect, the employee would not be paid a salary for a period just in excess of three months. In a rather unusual twist, the employee through his solicitors brought an injunction to restrain his former employer from preventing him taking up his new employment. One must realise that injunctions are granted rather reluctantly by the Courts, particularly in relation to employment contracts, and it is generally accepted that an injunction will not be granted if damages, or compensation, is a more appropriate remedy. The judge, however, decided that there was a fair case to be tried, even though the only loss to the employee would be three months salary. The point this illustrates in my view is that the Courts in Ireland are reluctant to enforce non-compete clauses, and one reason for that is that the employee has a limited ability to negotiate when entering into the contract of employment. The employer has clearly greater bargaining power at the point of employment, so the employee has no option but to accept the restrictive covenants. That being said non-compete clauses do in my experience have a persuasive effect on the employee, and do influence the decision as to whether to leave to work for a competitor or not. All things considered, it is better to include a non-compete clause particularly where the employee will be privy to sensitive information and practices which could be of value to a competitor.

A recent English case does potentially give employers more cause for comfort with restrictive covenants. In that case there was a restrictive covenant in the employment contract preventing the employee for six months after he left the employment from working with any existing customer with whom the employer had business dealings. In August 2013, the employer lost a valuable contract to a competitor, and the employee resigned and in effect began working for the competitor providing the same services they had provided while in their previous employ. The former employer wrote to the employee pointing out that he was in breach of restrictive covenants and threatened an injunction if the employee did not provide an undertaking, or a written promise, that he would honour the covenants. The employee took legal advice and gave his former employee this undertaking. The employee then tried to renege on his undertaking after the new employer agreed that it would meet any legal costs incurred if the former employer was to sue.

The former employer acted on their threat and subsequently applied to the High Court for an injunction. The final decision of the High Court was to refuse to grant the employer its injunction because the Judge decided it was a disproportionate response and it would serve no legal purpose, as the former employer had lost the contract to their competitor. What is relevant to this briefing is what the High Court decided in relation to the restrictive covenants.

The High Court noted in particular that the employee had entered into the undertaking after he had left the employment, so there was not the presumption of unequal bargaining power that exists between the employer and employee when the initial contract of employment is signed. It was also important of course that the employee had received legal advice before entering into the undertaking post-employment. The High Court noted that ordinarily when dealing with restrictive covenants the employer is required to prove that such clauses are reasonably necessary to protect legitimate business interests. In this case, the Judge reversed the burden of proof on the employees because they had signed the undertaking post-employment. The onus was on the employees to prove that setting aside the restrictive covenant was justified and the High Court decided that the employees had failed to do this.

While the High Court refused to grant the employer’s injunction which is broadly in line with the practice generally in Ireland and the UK, it does illustrate the benefit of getting employees re-affirm covenants when they terminate the employment, and this can be achieved by means of a settlement or termination agreement. It might not get the employer over the line if he should bring an injunction, but certainly should improve his prospects and again actively dissuade an employee from breaching the particular restrictive covenant.

Leave a Reply