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Spotlight on restrictive covenants and impact on innovation.

Byline: Robert Forsyth

THE department for Business, Innovation and Skills is to investigate employment rules that affect small businesses and has called for evidence on areas which impact innovation.

One area is the inclusion of 'non-compete clauses' in employment contracts which are a restriction on an employee's activities if they leave the business.

They protect the firm from the departing employee taking clients, customers or other staff with them or competing against them by joining a competitor or setting up a new business.

The government's call for views on the use of restrictive covenants highlights the difficulty in balancing the interests of companies protecting their businesses, encouraging competitive firms to grow and allowing freedom of choice to customers.

Employers should carefully consider the appropriateness of restrictive covenants when drafting employment contracts.

In order for a restrictive covenant to be enforceable by an employer it must be reasonable, taking into account the interests of both parties as well as the public interest.

The starting point is that restrictive covenants are unenforceable as a restraint of trade.

It is then for an employer to show that the covenant should be upheld by a court.

The question of reasonableness of a restrictive covenant will be considered in light of the "legitimate proprietary interest".

Examples include trade secrets, confidential information, trade connections and a need to protect the stability of the employer's workforce.

Employers must draw a distinction between skills and expertise acquired by the employee on their own account and the employer's genuine trade secrets. Although an employer may consider a restrictive covenant to be reasonable when the employee leaves, it must also have been reasonable at the time the employee entered into the employment contract and was said to be bound by the restriction.

One of the most important considerations when drafting restrictive covenants is deciding the length of the covenant.

Three to six months for senior employees below board level may be appropriate if they are key employees and 12 months for senior employees or directors may be acceptable.

Anything longer than a year will be extremely hard to justify and employers will have to show a special circumstance genuinely applies, for example it operates in a very niche market.

Employers should ensure they do not apply a blanket approach when drafting restrictive covenants as this will leave them open to challenge.

Finally, employers must tailor restrictive covenants specifically to employees in line with their role, experience, seniority and interaction with clients.

Well drafted restrictive covenants provide a wide range of protection to employers from court injunctions preventing a former employee from joining a competitor to damages awarded for loss of profit and reimbursement of the majority of legal fees.

Provided an employer is able to meet these criteria, it should be able to demonstrate that such clauses are not stifling innovation but serve as legitimate protection to its business.

Robert Forsyth is a senior associate in DLA Piper's Employment practice

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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:May 12, 2016
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