Restrictive Covenant - Employment

[cleanpairofheels]

Advice sought re. a Restrictive Covenant in employment.

My son works for a small UK company that has unique software. His role has been in its application visiting several client sites for installation/ commissioning.

The company has just been purchased by a large USA agglomerate paying megabucks to the directors. My son has been a staff member for a year and has no equity. There are no restrictive covenants in the existing employment contract.

He has just been handed a new contract by the new owners that has a Restrictive Covenant which prevents him joining another company in the same business for 12 months. Such are the nature of the business it basically rules him out working anywhere for all of this 12 months. It looks as though the new owner has imposed the same conditions on the staff members as for the original directors. I doubt that the new company will change their stance.

Have looked on the web (Citizens Advice etc) I note the following clauses:

“No matter what’s in your contract, your old employer can’t stop you taking a new job unless it could lose them money. If a restriction would stop you getting a job that didn’t affect your old employer, it might not be reasonable.”

I have some questions that hopefully people's experiences will clarify:

1) I feel the new contract is unreasonable as he is a junior member of staff and wasn’t involved in the writing of the software code. With only a year’s experience this requirement seems excessive.
2) How enforceable is the restrictive clause?

Comments appreciated as he is being put under pressure to sign the new employment contract which he is very reluctant to do. I understand that the new client needs to protect its IPR but I think this is overkill. If he doesn’t sign the new contract then I assume that he will be fired and have to look for another job.

[melonfool]

Almost entirely unenforceable.

This is typical of US companies, big bully boys who don't care about UK law.

I doubt they would bother to try to enforce it at his level. Many employers do just bung the same restrictions in all contracts, regardless of whether they make sense, but more to scare staff than to try to enforce them later I think.

He could sign then email to say he 'signed under duress' and that he felt he was not bound by the new restrictions.

It all depends how much of a stand he wants to make now, or whether he's happy to leave it until he leaves and then see if they cause an issue.

Mel

[fuiseog]

Even if they paid an employee for the 12 month period, i.e. as a form of 'garden leave', this kind of restriction seems unreasonable, especially for a young person who needs to continue in employment to develop the skills, experience and track record that's needed to progress their career.

I wouldn't take the threat seriously. If I was in his position I'd sign the paper, carefully filing away my copy in case of future need. After all, he's been employed for <2 years so he can be dismissed very easily without comeback for the employer. I'd suggest keeping his powder dry and moving on when it suits him.

If this work is something he wants to do, and if he is picking up skills and constructive experience of value to a future career, why rock the boat?

If the new employer is going to be difficult I'd suggest keeping a journal/diary, recording all incidents where they seem to be acting out of line with employment best practice. It could be useful in the unlikely event that they attempt enforcement of the restriction.

"This is typical of US companies, big bully boys who don't care about UK law." That sweeping statement is not one that I agree with. I know too many good Americans, and I've enjoyed working for a few very decent US employers.

You could contact ACAS and see if they have someone who can give a view on the new Contract.
http://www.acas.org.uk/index.aspx?articleid=1461

I hope it works out for your son.

fuiseog

[Mark]

I work in the finance/banking industry, and know of people that have been in this kind of situation - where the employee is subject to a covenant to not move to a competitor for a period of time, which is greater than the notice period.

In spite of the fact this does not appear enforceable under English law, when these people have moved jobs, the new employer has been generally unwilling to place them in the competing role until the covenant period is over.

Maybe this doesn't apply in the software industry, but I'd suggest he is very careful about ensuring any new employer is comfortable about the situation before he makes the move and resigns.

[melonfool]

If the new employer is going to be difficult I'd suggest keeping a journal/diary, recording all incidents where they seem to be acting out of line with employment best practice. It could be useful in the unlikely event that they attempt enforcement of the restriction.


fuiseog

Employment 'best practice' doesn't mean anything at all, only the law matters - you can't bring a claim that a company did not follow 'best practice'.

Mel

[melonfool]

I work in the finance/banking industry, and know of people that have been in this kind of situation - where the employee is subject to a covenant to not move to a competitor for a period of time, which is greater than the notice period.

In spite of the fact this does not appear enforceable under English law, when these people have moved jobs, the new employer has been generally unwilling to place them in the competing role until the covenant period is over.

Maybe this doesn't apply in the software industry, but I'd suggest he is very careful about ensuring any new employer is comfortable about the situation before he makes the move and resigns.

Actually, yes, financial services can be a bit iffy about that, though not so much at junior levels. At senior levels I have usually asked staff to sign a disclaimer to say they know of no restrictions to their employment by 'us' before they can join. I've never bothered with any other type of employer though.

Mel

[didds]

He could sign then email to say he 'signed under duress' and that he felt he was not bound by the new restrictions.

Coukd he draw a line through that clause and initial it Mel, signing the contract thus ammended and asking them to return his contract with them having also initialed/signed the drawn out clause?

Would that be feasible? Or is that potentially in your experience just a red rag etc?

didds

[melonfool]

He could sign then email to say he 'signed under duress' and that he felt he was not bound by the new restrictions.

Could he draw a line through that clause and initial it Mel, signing the contract thus ammended and asking them to return his contract with them having also initialed/signed the drawn out clause?

Would that be feasible? Or is that potentially in your experience just a red rag etc?

didds

He can obviously physically DO it, but they will just send him a new contract with that clause in to sign - employers have all the power here. I have NEVER had anyone get agreement to change a contract clause below director level.

Mind you, tribunals also know that employers have the upper hand and that they can tend to exploit it, which is why they are often viewed as being 'on the side of the employee' (not my view, having never lost a tribunal other than ones where we knew we had done wrong and had to lose).

Mel

[scotia]

a Restrictive Covenant which prevents him joining another company in the same business for 12 months

I'm wondering what the "same business" covers in law. If the second company has other clients, or has slightly different products can it be described as being in the "same business" as the first company? Shylock's failure with the pound of flesh comes to mind - the devil is in the detail - although that decision was not tested in a UK court.

[killergorilla]

I've had these before. I wouldn't worry too much.
They're less to stop someone working for a competitor and more to avoid the situation where their secrets or proprietary information is used inappropriately. I once hired someone from a large competitor (for their skills). The legal team of said competitor called me and asked for an undertaking that I would not abuse any information accidentally disclosed. It was something I was happy to agree with and my word was good enough for them.
Ultimately the remedy they have is to sue the individual for breach of contract. It's unlikely that he would have the means to be worth suing so these clauses are largely legalese bluster to make people think twice before divulging confidential information.
As an aside it's always tempting for people to leverage confidential information....but someone who's prepared to do that to their last employer is a risk to me so I would not look favourably on it at all.
KG

[melonfool]

They're less to stop someone working for a competitor and more to avoid the situation where their secrets or proprietary information is used inappropriately.

In every employment contract I have seen or written, IPR protection is a separate clause to the restrictive covenant, they are not the same thing.

IPR is protected in common law anyway, it doesn't even need a contract clause, but employers put it in to focus the mind.

Ultimately the remedy they have is to sue the individual for breach of contract. It's unlikely that he would have the means to be worth suing so these clauses are largely legalese bluster to make people think twice before divulging confidential information.

No, they don't sue for money, they sue to prevent the ex employee working at the new place, they sue for an injunction or for the upholding of the contract clause. But, this is the restrictive covenant I'm talking about (per the OP) which is nothing to do with confidential information.

Mel

[UncleEbenezer]

For what it's worth, I've had those clauses from two US employers, and in both cases successfully negotiated a mutually satisfactory rewording. Surely worth a try.

In one case the work was part-time, and a clause dealt with who else I could work for simultaneously. The initial contract would've prevented more-or-less anything in software development, but I put my foot down and got it rewritten to be much more specific. During my time in that job I was indeed approached by a direct competitor to do similar work, which could have been financially attractive. I replied pointing out that it would seem to be a conflict of interest.

Come to think of it, I've had worse outcomes from companies closer to home. My US employers and clients have generally treated me much better than those this side of the pond.

[9873210]

He can obviously physically DO it, but they will just send him a new contract with that clause in to sign - employers have all the power here. I have NEVER had anyone get agreement to change a contract clause below director level.

I have. As an Engineer II so no supervisory responsibility. The contract clause required me to "certify that none of my relatives worked for customers or suppliers." I replied "I have relatives, most of them work. You're big enough that many if not most companies probably fall into one of those categories, and I am not privy to that list." They replied "let me talk to someone", ..., ... "Never mind, just cross it out, you're not in sales or purchasing."

On the other hand I believe the majority of purchasing and sales had signed that clause and very few of them were single, orphaned, only children. I presume that there was absolutely no intention of enforcing that term as written, but they didn't know how to write a general clause about conflicts of interest.

Employers do not have all the power, without employees their work does not get done.

[didds]

The contract clause required me to "certify that none of my relatives worked for customers or suppliers."

I would have thought that was completely unenforceable surely?

And what defines "relative"? Great-uncle? Second cousin? paternal uncle's wife (ie aunt) with no other connection than marriage? Maternal aunt's ex-husband? Cousin's gay partner in a relationship but no marriage/civil partnership?

And if that were the case on starting, what if one's relative then DID start a position at a rival/client/supplier/etc? Does that mean one is now out of a job?

didds

[bungeejumper]

On the other hand I believe the majority of purchasing and sales had signed that clause and very few of them were single, orphaned, only children. I presume that there was absolutely no intention of enforcing that term as written, but they didn't know how to write a general clause about conflicts of interest.

Surely, the point of the exercise was simply to cover their own backsides? With that clause in place, they'd always have something to come back to you about if your cousin's gay partner's milkman's sister said something that exploited or abused your privileged position of trust.

And even then, they'd have a problem making it stick in law, but they'd always be able to turf you out for gross misconduct, or similar. And it's that possibility that's going to keep you in line while you're working for them.

BJ

[cleanpairofheels]

Update.

Firstly many thanks to all for your contributions. Its been a harrowing week for my son to decide whether to sign the contract or not.

Secondly, an update. As expected the company refused to change anything in the contract. They were basically saying take it or leave it. My son googled and found the company involved had actually taken some ex employees to court for breaking the contract, and won...which rather spooked him.

They also put massive pressure on him to sign by Friday noon (which was 3 day's notice). They then added to this that if he didn't sign then he wouldn't be paid, which was a real issue as he was wanting to make an offer on a flat soon. Reluctantly he signed as he saw that he didn't really have any other option.

At the back of my mind I saw their stance as making him sign under duress (thanks Melonfool), and I believed that there was adequate burden of proof in the emails chasing him up to sign. It may not be sufficient evidence, but it certainly made him feel better.

So in all a very poor experience with the new company, and only time will tell if the decision was the correct one.

[dspp]

I've been travelling so have not had a chance to comment.

He was right to query it. They are wrong, and bullies, to not flex on this. It is understandable that he has buckled.

Although in the UK it is likely not enforceable he would be sensible to carefully make copies of all correspondence regarding this, and his old contract, and to write a diary note to himself (maybe cc you (and dated and signed by you both, i.e. contemporaneous evidence)) regarding the fact that he feels as if he is under duress in this respect. If it ever goes pear-shaped that may come in handy.

Then he needs to buckle down to saving up a "f$%%^-you-pill" and becoming more widely employable, and learning as much as possible, whilst observing carefully how the new owners run the business. He may want or need to move on sooner rather than later. It depends on how the reality pans out.

regards, dspp

[Slarti]

At the back of my mind I saw their stance as making him sign under duress (thanks Melonfool), and I believed that there was adequate burden of proof in the emails chasing him up to sign. It may not be sufficient evidence, but it certainly made him feel better.

Tell him to take copies of all the emails to and from him regarding this matter. Print them out or forward them to a personal email address.

My son googled and found the company involved had actually taken some ex employees to court for breaking the contract, and won...which rather spooked him.

In the UK?

Slarti

[melonfool]

My son googled and found the company involved had actually taken some ex employees to court for breaking the contract, and won...which rather spooked him.

In the UK?

Slarti

I was wondering that, I'm not really sure how you would find UK ones anyway, presumably this is heard in the county court?

Mel

[cleanpairofheels]

Slarti has asked for the location of the court judgement. (good point)

My son found two cases both of which were USA based in their district court. The cases were linked but were handled separately in the courts:

- The ex-employee for breach of covenant and misappropriation of trade secrets. It was handled out of court and involved liquidated damages.

- The new employer for misappropriation of trade secrets. The USA company was awarded actual and punitive damages.

It may have been a clear case of breach, but these things spooked my son (a bit like reading a medical journal....)

There may have been others but I don't think that he found any UK based examples.