Restrictive covenants in the recruitment industry
25 August 2020
Restrictive covenants, also known as post-termination restraints (“PTRs”), are widely used throughout the recruitment industry to protect businesses from the impact of employees leaving to set up or join a competing business.
However, PTRs may be unenforceable unless they are well-drafted (in line with the latest cases), tailored to the specific needs of the business and re-affirmed at appropriate times.
Here are our top tips for recruiters to ensure your PTRs are effective.
1. Ensure that the scope of any non-compete restriction goes no further than necessary to protect the legitimate interests of the business
Non-compete restrictions are the most severe form of restraint designed to prevent a former employee from competing for a defined period of time. The courts will only enforce this type of restriction when the business can show that the drafting only goes as far as reasonably necessary in the circumstances. In Tillman v Egon Zehnder the Supreme Court ruled that a six-month non-compete went too far in restraining a former recruitment consultant from holding even a minority shareholding in a competing business. The Supreme Court also emphasised that the courts will continue to adopt a cautious approach when examining these restrictions.
Our recommendation is to limit non-compete restrictions to more senior or influential individuals within the business, who would be well-placed to take advantage of their access to your confidential information or business strategy at a competitor. You should also ensure that if your non-compete prohibits a former employee from being ‘concerned’ or ‘interested’ in a competing business, that an appropriate exemption is drafted for minority shareholdings for investment purposes.
2. Carefully define restricted clients and restricted candidates for non-dealing and non-solicitation restrictions
The most popular types of PTRs for recruitment consultants are non-dealing and non-solicitation restrictions. Non-dealing clauses typically prevent any type of business contact (whether or not solicited by the individual) whereas non-solicitation clauses prevent solicitation, enticement or encouragement of candidates or clients to move to the competitor.
A clause restricting dealings or solicitation of all clients and candidates ever to have worked with anyone in the business is unlikely to be enforceable. Therefore, it is important to consider carefully which clients or candidates should be within scope. For example, these may be clients for whom the consultant had account manager responsibility, or candidates with whom the consultant has had material contact within the last 12 months.
In Berry Recruitment v Donovan the business successfully obtained an interim injunction preventing their former consultant (Brooke Donovan) from dealing with restricted candidates and restricted clients for the duration of her six-month PTRs. Our article on this case explains the background and the court’s decision and also considers the evidence needed to obtain an injunction to enforce non-dealing and non-solicitation restrictions.
3. Make bonuses, promotions and pay rises conditional on employees entering into fresh restrictions (or reaffirming existing PTRs)
English courts judge the reasonableness of restrictions from the date they are entered into. In Tillman v Egon Zehnder (referred to above), Ms Tillman joined as a consultant in 2004, but departed in 2017 (after a number of promotions) as co-Global Head of the Financial Services Practices Group. The relevant PTRs were judged based on Ms Tillman’s role when she joined.
To ensure you can rely on a former employee’s seniority, influence and remuneration as justification for their PTRs, we recommend that you enter into fresh PTRs at regular milestones (or reaffirm existing ones). At the same time, you should consider whether the duration of the individual’s notice period is appropriate and whether to add any express obligations applicable during employment. For example, to act in the best interests of the business at all times, and to disclose any information which may adversely affect the business’s interests including plans to compete.
For further advice about restrictive covenants or employee competition, please get in touch. We are happy to provide fixed-fee reviews of your existing PTRs to identify potential gaps and opportunities to improve drafting. We can also draft and tailor PTRs specifically for your business, as well as providing advice on what to do if you suspect that an employee (or group of employees) may be leaving to set up or join a competitor. For more information about employee restrictive covenants please also see our article published in PLC magazine.