Many senior level employment contracts contain restrictive covenants. The restrictions usually relate to the ex-employee not working for a competitor within a specific geographical area for a specific period of time and not poaching your key staff members.
The law on the enforceability of restrictive covenants is complex.
In most cases, the presence of the restrictions alone will usually deter most employees from breaching them. However, breaches do occur in which case an employer will want to act swiftly to prevent or minimise any damage caused by the employee’s breach. If a threatening letter from a solicitor doesn’t do the trick the next stage will be to issue a claim in the County Court for an employment injunction and possibly damages. The problem is that it could take up to 9 months for your claim to reach trial. By that time the damage and loss caused by the employee’s breach could be irreparable. So what’s the answer? The answer is that you need to apply for what’s known as an interim injunction.
What is an interim injunction?
An interim injunction is an injunction that you ask the court to order pending the final outcome of your claim for a permanent injunction or damages. Essentially it preserves the status quo and prevents any further loss whilst the court decides the full claim. Interim injunctions are also complex. This note describes in brief the key factors the court will consider when deciding to grant one.
What does the court need to consider?
Firstly, whether there is a serious issue to be tried. In other words, does the employer’s claim have some substance (as opposed to being frivolous or vexatious)? This should, in most cases, be relatively easy to satisfy.
Would damages would be an adequate remedy if an injunction was not granted? If the answer to this is yes, then the court is unlikely to grant an injunction. However, in most cases it will often be difficult to prove that damage has been suffered as a result of the breach. Also, there may be a clear risk that additional (and perhaps unquantifiable) losses will be caused if the breach continues. Finally, if the ex-employee cannot afford to pay the damages anyway then this is likely to mean that they would not be an adequate remedy.
If damages are unlikely to be an adequate remedy, where does the balance of convenience lie? In other words, which party would worse off if the court decided to grant the injunction and which would be worse off if the injunction was not granted? If the employee has not actually started work for a competitor, the balance of convenience will often fall in the employer’s favour. This is because, if it was subsequently decided at the final trial that an injunction should not have been granted the employee is likely to be sufficiently compensated in damages by the employer. In addition, the court is also likely to consider:
- the harm caused by the breach and the likely future harm to the employer’s business;
- whether the employer will be adequately protected by the grant of the injunction;
- whether more harm will be caused to the employee if the injunction is granted rather than to the employer if the injunction is not granted.
- whether the employer has delayed in enforcing the restrictive covenants, and if so, why; and
- whether there is a real prospect that the employer might succeed in its claim, if the matter proceeds to a full trial.
When should you apply for an interim injunction?
As soon as possible and usually at the same time as the actual (full) claim is issued. If however there is a real need for urgency you can sometimes apply before the actual claim is issued.
Employer’s cross-undertaking in damages
Finally, if an interim injunction is granted the employer will usually be required to give an undertaking to the court (referred to as the cross-undertaking). This means that the employer agrees to compensate the employee if it is later found that the injunction should not have been granted. In some cases, the employer might also have to compensate third parties such as the new employer if they have also suffered a loss as a result of the interim injunction.
What about costs?
As with most applications to the civil courts, the loser pays the winner’s costs. This means that if the employee successfully defends your application for an interim injunction you will probably have to pay their legal costs. As a rough guide, the successful party usually only recovers around 70% of their costs.
What should I do about restrictive covenants?
Court proceedings are both risky and expensive. It’s better to spend time and money ensuring your restrictive covenants are as robust and enforceable as possible in the first place. Restrictive covenants are best if they are specifically tailored to each employee. If you use the same standard ones for a variety of employees then there is a risk you may struggle to enforce them.
If you do find yourself in the unfortunate position of dealing with an employee who has breached their restrictive covenants the best advice is to instruct a solicitor (and if relevant inform your insurers) as soon as possible. As ever, also ensure that all evidence of the breach and the loss is gathered and preserved because that will be necessary in both your application for an interim injunction and at the full trial.
Jeremy is an employment disputes solicitor in our St Austell office. To discuss the content in this article or any other HR issue call 01726 74433 or email employment@stephens-scown.co.uk.