Minimise Business Risk By Keeping Contracts Tight And Reviewing Content

Comment from Catherine Gannon, Founder, Gannons Solicitors

I wonder how many people took a sharp intake of breath when the news broke from Greene King’s Annual Report that they had paid their outgoing CEO £850,000 to secure new settlement terms when it became obvious that his contract was inadequate?

According to the report, he had remained on the same contractual terms since his original appointment in 2004, requiring him to give only six months’ notice, and did not have appropriate post-termination restrictive covenants that reflected his position at the time of his resignation. The contract, if kept updated, could have restricted him from joining a competitor or recruiting key members of his team and not left Greene King exposed at a time of critical leadership transition.

No-one wants to waste time on employment documentation, but this recent example in the hospitality industry serves as a warning that up to-date employment contracts can minimise your business risk. The areas most commonly in need of review are the post termination provisions which commercially should match business requirements and therefore change as the business develops. Without a contract and the right policies, employers are exposed and there is a presumption against employers in law.

Contracts are a necessity for running a stable workforce and eliminate any ambiguity and, as they generally have day to day control of a business, contracts for directors involve different considerations to those of other employees. If your business doesn’t already have a process in place to review director and employee contracts regularly, now would be a good time to introduce one.

Apart from making sure that the notice period for both parties is appropriate, particularly if there has been a change in role and responsibilities, director and employee contracts should incorporate several key factors to protect your business when they leave.

Restrictive Covenants

It’s not uncommon for both employers and employees to wish that they had thought about restrictive covenants before the risk occurred. With courts updating their views on their enforcement the goal posts are changing so there should be no ambiguity.

Employers must make sure that the company assets are adequately protected with restrictive covenants for new hires as well as amending exiting covenants to keep them up to date. Expert advice may also be required to implement enforcement when the employee or director leaves.
Restrictive covenants usually define mechanisms for:

Protection – of the employer’s legitimate interests, for example trade connections, customers, prospective customers, their workforce
Extent – for how long and over which geographical areas
Senior or junior employee

The enforceability of restrictive covenants depends on the person’s status in the organisation with restrictions placed on senior employees or directors more likely to be enforceable than the same restriction placed on a junior employee.

Some common inclusions are:

Prospective customers – Employers can enforce clauses preventing ex-employees dealing with their actual customers, but it’s trickier to enforce a clause preventing the ex-employee dealing with companies with whom the employer has only had previous “negotiations”
Confidential information and trade secrets – employers may wish to prevent former employees exploiting confidential business information and trade secrets, but the business must identify what information is protected by restrictive covenants, and what isn’t. However, note that specific items of information may indisputably belong to the ex-employer, for example customer lists, business plans, delivery routes, price lists, costings and supplier details.
• Typical post-employment restrictions may prevent ex-employees soliciting customers, clients, suppliers and other employees for a defined period after termination. A well drafted and enforceable covenant will protect an employer’s confidential information, trade secrets, customer connections, sales, goodwill, and workforce

Keeping restrictive covenants up to date

Employers should update restrictive covenants whenever an employee or director changes role. Usually that person gains access to new intelligence covering suppliers, customers or know-how and this must be reflected in their contract.

What if an employee refuses to enter into restrictive covenants?

Refusal to sign can be grounds for a fair dismissal which should not give rise to a successful claim for compensation from the employer for unfair dismissal.

A Court will consider many factors relating to whether a restriction is enforceable, such as how long it lasts, geography, seniority of employee and potential restraint of trade. Therefore, good advice and good drafting of restrictive covenants is so important.

Breach of restrictive covenant

If an employee ignores the restrictions, which turn out to be enforceable, there are serious repercussions. To enforce the restrictions the business can:

• Obtaining an interim injunction
• Seek damages from the employee for breach of the restrictions
• Sue the new employer for inducing the employee to breach their contract

Garden leave

Specific Garden Leave clauses can be useful as this means you can exclude the employee from the business without risking breaching the restrictive covenants. A decision is needed on whether employees should be placed on gardening leave to protect against a breach of restrictive covenants. Concerns are usually focused around the risk of the employee poaching clients or joining a competitor.

For more information, please visit www.gannons.co.uk or call Catherine Gannon on 020 7438 1060.

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