Legal advisor: How employers protect their business

A departing employee can cause a lot of damage to a business, particularly in 'people businesses' where the strength of the business is largely determined by the strength of the relationship between the employee and the clients.

For example, a hairdresser will build up a strong relationship with repeat customers. If he or she leaves to set up a rival business next door, there is a strong chance that the clients will follow. What can the former employer do to protect his or her own business?

There are several steps an employer can take:

1. Implied terms
2. Restraint clauses
3. Garden leave clause

If there is no written contract then there is little an employer can do. The employee must still honour the implied terms of any contract, including a duty not to disclose confidential information. For example, the new employee cannot disclose the business plan of his or her previous employer or any other information that is business sensitive. If he or she does then the old employer can bring injunctions to stop him or her, and sue for damages where loss can be shown.

2. Restraint clauses
Many employers will include clauses in the written contract to provide additional protection. These are known as 'Restraint Clauses' or 'Restraint Clauses'. This may try to prevent the employee working within a physical area or within the same business field.

For example, 'after leaving employment you agree not to work as a solicitor within a five mile radius of this office' But just because this clause is in a written, signed contract does not mean the employer can rely on it. The law balances the interests of the employer in protecting the business, with protecting the right of the employee to continue to earn a living.

Let's look at the legal position:

Which clauses will be enforced?
The courts will only enforce these clauses to the extent that they are reasonable. Whether a particular clause is 'reasonable' will depend upon the circumstances.

Perhaps it is easiest to examine these clauses and the courts approach by looking at an example. Assume there is a written and signed clause that says: 'After leaving employment you agree not to work as a solicitor within a five mile radius of this office.' Is this reasonable?

We need to look at more facts before deciding. In particular we will examine whether it is reasonable as to:

• Time
• Type of business covered
• Area
• Public policy

The above clause tries to protect the old business without time limit. It therefore, will almost certainly be unenforceable. If the restriction was for three months it is likely to be upheld by the courts. Six months is usually accepted, as indeed is 12 months. Anything over 12 months is unlikely to hold, but could in extreme cases.

A key point to note is that the courts will not rewrite the clause to make it enforceable. In other words, the courts will not rewrite this clause to say 'it will apply for three months'. In this case it will fail completely.

Type of business covered
The clause can only protect an employer's business that is under threat. Accordingly, if the clause said 'you agree not to work', then it will almost certainly be struck out.

The wording in the example says 'will not work as a solicitor'. Even this may be held to be too wide these days. As solicitors are now so specialised, if, for example, the individual previously specialised as an employment lawyer and intended to specialise as a criminal lawyer in the new business, this would not threaten the business that he or she left.

Accordingly the courts may regard the clause as too wide and, therefore strike out the whole clause.

Area
'Within a five-mile radius'. Is this too wide? Depends on the circumstances. If the individual was previously working in the City of London, then preventing him or her from working within a five-mile radius is clearly severely restricting that person's ability to earn a living. This would almost certainly be struck out.

Blue pencil test
This is a very important part of this area of law. If a court regards a clause as being too wide it can delete the offending words. If the clause still makes sense after these deletions then it will be enforceable. The court will only delete words; it will not rewrite, add or substitute words.

This explains why many clauses are so long-winded and repetitive. They should be written so that if one part of the clause offends the court then it can be struck out (crossed out with a 'blue pencil') without rendering the rest invalid.

This blue pencil test can only be applied if:

• The unenforceable part of the clause can be removed without needing to add or change the remaining part.
• The remaining terms and conditions continue to make sense.
• The removal of the words does not change what the clause set out to do.

These clauses will only be enforced by a court order to prevent the employee from working. These are expensive, but the threat of court action is often enough to intimidate many employees (and prospective new employers). In practice these disputes are often settled by negotiation and striking a deal.

3. Garden leave clause
A key related area is the use of the so-called 'garden leave' clauses. They are regularly used by employers and are generally much more enforceable by the courts.

Under such a clause an employer will require an employee to work out his or her period of notice, but prevent him or her from coming into the office. Typically they require the employee to stay at home - 'working in the garden'.

Most employment contracts give the employer the right to determine where the employee should be working. When the employee is working out a notice period, they are still employed and being paid.

The employer will largely be able to require the employee to work in a place of the employer's choosing. This can include preventing the employee from coming into the office for fear of him or her accessing further confidential information etc.

Similarly the employer can require that the employee does not join his or her new employer, because the existing contract of employment is still in operation.

The downside for the old employer is that it must continue to pay the employee his or her full wages and benefits. Employees can challenge these clauses in very limited circumstances. To do so they need to provide a strong case that their livelihood will be jeopardised if they are prevented from attending their regular place of business.

They need to prove that contacts and profile are very important and will be substantially jeopardised if they are prevented from attending the office. This is a grey area and is usually resolved as part of the termination negotiations.

In particular the employee will typically argue that he or she has been constructively dismissed, rendering the contract at an end and therefore free to join a new employer.

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