It is fairly common for employers to include restrictions in their employment contracts to control what an employee can (or more specifically, cannot) do once they leave their employment. These are called ‘Restrictive Covenants’.
The scope and duration of the Restrictive Covenants will vary depending on the type of work that the employee is doing, and their seniority within the business. Generally, the main types of Restrictive Covenants are:
- Non-solicitation – an employee cannot take a positive act in contacting a customer or client of the former employer or make an initial approach, with a view to obtaining their business.
- Non-dealing – this is an extension of “non-solicitation”, to include not only positive acts but also to restrict an employee from providing goods or services to any customer or client of the former employer, even if it was the customer/client who approached them.
- Non-poaching – the former employee cannot seek to entice any other employees away from the former employer.
- Non-competition – the former employee cannot work for a rival employer for a defined period of time and geographic area after termination of their employment
Restrictive Covenants are not always enforceable. If an employer wishes to enforce these terms against a former employee, they will need to satisfy the Court that they are reasonable and that they go no further than is absolutely necessary to protect the employer’s legitimate interests. In order to assist with this, Restrictive Covenants are usually limited by (i) duration in time (ii) geography and, even, (iii) only to specific clients or customers.
The more specific and considered the scope of the Restrictive Covenant, the more likely it is that it will be deemed to be enforceable.
So, if you are an employer and a former employee breaches their Restrictive Covenants, what can you do?
This largely depends on (i) what covenant has been breached and (ii) the extent to which it has been breached.
In the most serious cases, employers may consider issuing a claim to seek immediate injunctive relief against the former employee. This would ask the Court to order the employee to stop breaching the Restrictive Covenant(s), with penalties for non-compliance ranging from (unlimited) fines to even imprisonment (albeit that is extremely rare).
An employer may also claim damages (monetary compensation) from a former employee for breach of their restrictive covenants. Such types of damages can include:
- General Damages – this is a claim for the losses actually suffered as a result of the breach. For example, if a former employee breached their Non-Solicitation covenant and took a customer contract to their new employer, the employer could seek to recover the profit that it would otherwise have enjoyed from that customer’s contract. There are many factual elements to consider when assessing the amount of general damages that might be awarded. For example, if the customer did not have any long-term commitment to the employer’s business, then it would be difficult to prove that they left because of the former employee, or that they would have continued to give their business to the employer in any event.
The purpose of general damages is to put the wronged party (employer) back in the position (in financial terms) that it would have been in if the breach of the restrictive covenant had not occurred.
- Negotiating Damages – it can be difficult to accurately quantify and evidence the loss that a business has suffered if restrictive covenants are breached. Until 2018, the Courts allowed claims for what were then called ’Wrotham Park Damages’. Such damages could be claimed when a business could not quantify its losses suffered as a result of the breach. The Court would award the business an amount equal to what the former employee would have needed to pay to release themselves from the relevant restrictive covenant(s).
In 2018, this was changed and clarified by the case of Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20. In that case, it was decided that ‘Wrotham Park Damages’ should be renamed as ’Negotiating Damages’, and the Court decided that they cannot be used to avoid having to prove loss in the usual way. Negotiating Damages are therefore not normally available for breaches of Non-Compete or Non-Solicitation covenants. In these cases, a business must prove that it has actually suffered loss (i.e. general damages).
However, the Court did confirm in that case that a business could still claim Negotiating Damages in exceptional circumstances where it was not possible to quantify the economic loss suffered.
- Costs – In some circumstances, the employer may also be able to claim back its costs incurred in pursuing the claim against the former employee. This will depend on (i) the terms of the Employment Contract and (ii) the value of the claim.
Summary
It is often difficult to accurately calculate, and prove, what losses a business may have suffered if a former employee breaches their restrictive covenants. Each case will turn on its own specific facts, but the employer will have to prove what, if any, actual economic loss it has suffered as a result of the breach(s).
In exceptional circumstances, it might be possible to claim Negotiating Damages, if the business cannot prove its actual loss, but can demonstrate that loss has been suffered. However, this is not straightforward.
In these types of cases, time of the essence. It is important to act quickly if you think that a former employee is breaching their restrictive covenants so that (i) any damage can be limited as much as possible and (ii) evidence of any losses can be gathered without delay. This will assist with any claim made against the former employee.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2025.