Fair and reasonable contracts

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Companies have been told that they must be fair and reasonable to new employees when adding certain clauses to their contracts.

glassesIt is not unusual for an employee joining a new company to be required to sign a contract which includes clauses about what they can do when they leave the company.

These clauses are known as ‘restrictive covenants’ and usually prevent the employee from setting up their own business which would be in direct competition with the employers. They are a standard practice and it is understandable that an employer would want to include them in an employment contract.

In the company’s interest

It is certainly not in their interests to take on a bright young employee, train them, show them the ropes and mould them into an efficient, competent player in their industry only for the employee to leave and take half the company’s clients with them.

If that was the risk they ran every time they took on a new employee, they would be likely to favour candidates who seemed less ambitious and dynamic. This would be bad for any industry as the best talent would struggle to find work and the existing companies would be staffed by less effective ‘safe choice’ workers.

This would be a situation that nobody would want. So employers are able to add restrictive covenants to their employees’ contracts to protect them from such risks.

However the clauses have to be reasonable otherwise they would become unenforceable. The scope and duration of the clauses has to allow the employee to continue their career, and hopefully not cause too much detriment to the employer.

Restrictive covenant clause deemed unreasonable

This is what happened in a recent case involving an estate agent. He had a non competition clause in his contract which prevented him from:

  • Setting up a rival company within five miles
  • Working for a rival company within five miles
  • Persuading other employees to leave the company and work for him instead
  • Approaching the customers of his former employers for work

The clause was to last 12 months. It seemed reasonable but when it was breached, the court ruled in favour of the employee.

The man had left the company in January 2011 and set up his own estate agency less than two miles away. This was in breach of his restrictive covenant clause. However the court said that the nature of the estate agent’s work was that clients would come and go to live somewhere else. Estate agents do not get a huge amount of recurring business from their clients.

It was ruled that the scope of the clause was too wide and that the estate agent had been unfairly prevented from trading. This made the clause unenforceable.

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Speaking on Workplace Law, Andrew West, Employment Law specialist at Gotelee Solicitors commented “Each case is different – an ‘off the shelf’ restrictive covenant is unlikely to work for your particular business. It is very important to make sure that any such restrictions are reasonable to protect your business in your circumstances. Have a look at your restrictions and think about whether they may go too far.“