Romero Insurance Brokers v Templeton Ltd provides a recent example of the successful use of restrictive covenants in the insurance industry. Although only a first instance decision, it provides a useful guide to what to do – and what not to do – when seeking to ensure that an outgoing member of staff does not leave with his or her entire set of client connections.
Getting the contract right
In this case Mr Templeton had been required to sign a suitable contract of employment with carefully-drafted restrictive covenants. He had been recruited on the basis of his personal following, and so was required to enter into a non-solicitation covenant for 12 months after the end of his employment. Its scope was limited to clients with whom he had had dealings in the previous six months.
Restrictive covenants are not enforceable unless they go no further than is reasonably necessary to protect the employer’s trade connection with the customers with whom the employee has been dealing. In deciding that the test was satisfied in this case, the judge took into account that the 12 month restricted period correlated with the normal renewal period for most types of insurance. Although other factors were in play, this case comes pretty close to saying that a 12 month non-solicitation covenant will normally be reasonable in the insurance industry.
It may seem all too obvious, but a carefully drafted contract is of little help if the employee is not made to sign it. In addition, the contract needs to be regularly reviewed, since the reasonableness of the covenant is always judged as at the time it is entered into, not at the time it comes to be enforced. These lessons have been underlined in other recent cases where employers have failed (or almost failed) to enforce restrictive covenants.
Avoid breaching the employee’s contract!
A restrictive covenant will not be enforceable if the employer is in fundamental breach of the employee’s contract at the time it is seeking to enforce it. Typically employers ensure that there is a payment in lieu of notice clause in the contract of employment, which enables them to end employment immediately without being in breach of contract by failing to give the full notice period. Contracts are also recommended to include garden leave clauses, which allow an employer the option to keep the contract alive for a defined period without the need to dismiss, while preventing the employee from having contact with customers or attending the office.
Often, as in Romero, employees will claim that their employer’s conduct in the dealings leading up to operation of one of these clauses is in fundamental breach of contract – in other words they have been constructively dismissed. Mr Templeton sought to build such a case by citing a reduction in salary followed by a period of garden leave, combined with the start of a redundancy consultation which he claimed was a sham. The employer won on this point, though the judge observed the conjunction of these events had been “unfortunate”.
In circumstances where the restrictive covenant protection is key to your business it is therefore critical that you take appropriate advice if you are looking to discipline, dismiss or change terms and conditions of the employee whose restrictive covenants are important to you.