On 16 June, following a Government Call for Evidence, we sent out a survey to over 4,000 of our clients and contacts in HR and Legal teams to ascertain attitudes to the use of restrictive covenants in contracts of employment and their inhibiting impact, if any, on competitiveness in the UK market. Our respondents ranged in size from fewer than 10 employees to over 2,000 and from only a year or two in existence to over a quarter of a century.
Since our survey went out, we have of course had the Brexit vote. This will have one of two consequences for the Government’s covenant review – either it will become a matter of no real consequence relative to the other issues which Parliament must now struggle with, or it will become a key weapon in the UK’s fight to maintain an independent business economy outside the EU.
The Government’s Call acknowledged that there remains a place for restrictive covenants that are reasonable in their extent, coherent in their drafting and appropriate to achieve their purpose. Sceptics will say (indeed, I already have: http://www.employmentlawworldview.com/desperately-seeking-substance-bis-call-for-evidence-on-restrictive-covenants/) that our existing Court system effectively provides this already by striking out covenants which fail any of those tests, and therefore that no reform is necessary. But is that a common view? In addition, do employers take the “care and maintenance” steps necessary to keep their covenants focused and so enforceable, or are they left to go to seed as notional deterrents to start-ups and/or unfair competition, but ultimately without teeth?
When our formal submission is lodged we will post a copy on this blog. In the meantime, though the deadline for submission of responses to the Call is not until 19 July, here is a sneak preview of the feedback we received:
- The size of the task of reforming the law relating to covenants, if that is the Government’s direction, is evident from the extent of their use – of our respondents, over 93% had covenants in their standard terms of employment.
- However, it does not appear that these covenants are always given the thought which would allow the employer to say with conviction that they were focused on the risks posed by each employee – only 61% of respondents consider whether those standard covenants are appropriate to each new hire, and an even thinner 54% look at that question again when an employee is promoted or changes role.
- Our own experience is that departures from standard template covenants are relatively rare, indicating that even if such considerations do take place, they seldom lead to much tailoring of the restrictions. However, whether employers go through those hoops or not, they may be let down by their inability to prove it – less than 12% of our respondents retained any notes or other records of that consideration process.
- There are some mildly contradictory responses in relation to the impact of covenants on employers considering new hires. Over 35% do not insist on finding out whether a candidate is bound by covenants at all, and a similar proportion have taken a deliberate decision to disregard them in any case. Put differently, however, that means that about two-thirds of employers do have regard to covenants in a candidate’s contract and do seek to respect them. Over 35% of respondents take external legal advice on the covenants in a new hire’s previous contract. Against that, in answer to the question of whether such covenants had blocked the hire of someone they would have otherwise have taken on, nearly 84% of our respondents said not. That does tend to suggest that the deterrent effect hinted at by the Government is relatively limited in practice.
- 37% of respondents say that restrictive covenants in a potential hire’s contract had damaged or delayed their achievement of corporate objectives to develop or deliver a new product or service. Clearly the Government’s concerns about an inhibition on start-ups and entrepreneurialism are not wholly without foundation. However, that statistic by itself reveals nothing about whether that new product or service would have damaged the previous employer had it been allowed to proceed unmolested, i.e. whether those covenants in fact protected a legitimate business interest.
- That takes us to the question of what our respondents seek to achieve for themselves through the use of restrictive covenants. More or less 100% see them as measures to protect confidential information. That supports the view in the Call for Evidence that an action for a breach of confidence might be a viable alternative. That said, the same number use covenants to protect client relationships, about 75% to protect the stability of the workforce and 60% to combat unfair competition – these not being objectives achievable by actions for either breach of confidence or passing off/IP infringements.
- One of the Government’s concerns in the Call was the extent to which employees necessarily understand the covenants when they sign up to them. A surprisingly high 40% of our respondents say that they explain this specifically to their new appointments on arrival.
- In terms of actual enforcement, less than one respondent in five has taken court proceedings for breach of covenant or of IP rights. About half have sued or threatened to sue for breach of confidence. On the other hand, only 12% have faced action from their employee’s previous employer. That suggests that the deterrent effect, such as it is, is aimed mostly at the departing employee rather than the prospective employer. The common thread across our questions concerning enforcement was the very high proportion of claims, up to 80%, that were resolved by settlement. That suggests to us that employers in covenant disputes often get to a point they are happy with, implying that the covenants have had (to a greater or lesser extent) their desired effect.
We take two main conclusions from these survey results at this stage:
- That there is no pressing case for the reform of the law relating to restrictive covenants. There seems evidence in our results that employers do generally pay some heed to them, both in their own appointments and when on the receiving end of someone else’s. There is no real evidence to suggest that covenants could effectively be replaced by provisions relating to confidentiality or intellectual property, and the 93% take-up for them suggests covenants to be an accepted part of the contractual landscape. Only one employer in 6 has been put off a prospective hire by his/her covenants.
- That some employers are still not taking obvious steps by which they could give their covenants more muscle. While a healthy proportion say they consider their covenants per individual, only a minority seek professional advice and even fewer retain the evidence necessary to demonstrate their thinking, so creating an immediate hole below the waterline for any attempt to enforce them. Whatever the outcome of the Government’s review, good practice will remain that employers keep records of why they think their covenants are necessary.