Should you enforce restrictive covenants during a pandemic?

Non-compete clauses and other restrictive covenants are often used to prevent an employee from taking an organisation's commercial secrets to a competitor when they leave. But is it fair to enforce them when job opportunities are limited? Imogen Finnegan, senior consultant at Bellevue Law, weighs up the pros and cons.

2020 has presented many unprecedented challenges for HR professionals and countless businesses are facing the prospect of making redundancies.

Many firms include restrictive covenants in their contracts to protect their interests and commercial secrets when an employee leaves. But as the UK falls into a post-pandemic recession, how will employees who are made redundant fare if their contractual obligations limit their ability to secure a new job?

Regardless of the industry, every business has information - whether a client database or a new product prototype - that it would prefer competitors not to get their hands on. Restrictive covenants seek, among other things, to protect the use of such information with a new employer.

The most common types of restrictive covenants prevent an employee from: working for a competitor (non-compete); communicating with and poaching clients and/or suppliers (non-dealing and non-solicitation of clients/suppliers); and poaching employees (non-solicitation and non-engagement of employees).

Covid-19 has taken its toll on the global job market; a CIPD survey found that one in three employers in the UK are planning redundancies during the third quarter of 2020 and job vacancies remain scarce.

In such a tough economic climate, employees who are being made redundant will want and need unfettered flexibility and freedom to secure a new job within their area of expertise and experience. This means that HR professionals are likely to be faced with a difficult question: if an employee has a non-compete clause in their contract, and you are making them redundant, should you enforce it?

Weighing up restrictive covenants

If faced with redundancy due to the effects of Covid-19, employees are likely to ask for restrictive covenants to be waived. In particular, we expect to see a rise in the number of employees who ask to be released from non-compete provisions. Although an HR manager might not readily agree to waiving contractual obligations, this is not a wholly unreasonable request given the current climate. After all, from an employee's point of view, they are not choosing to leave; their role is being made redundant. Why shouldn't they be able to seek new opportunities without restriction?

Leniency - an unexpected upside…

If faced with such a dilemma, it's worth bearing in mind that there is an upside to leniency here - and not just for the employee. Aside from the satisfaction of knowing that you are helping your employees during a difficult time, generous behaviour will serve your brand and your reputation well in the long term. People have long memories, and the fact that your company has acted well, particularly during a global crisis, will resonate.

…and a definite downside.

Then again, there is an obvious downside to such an approach. If you are considering redundancies, you are losing staff because you have to - not out of choice. If a former employee moves to a competitor and takes business with them, this could cause further damage to your business at a difficult time.

Is there a middle ground?

Our short answer is yes. If an employee's contract contains non-dealing and/or non-solicitation restrictions, and you only waive the non-compete clause, there will be a limit to what the former employee can achieve for a competitor (at least in terms of encroaching on your business) - particularly if their employment contract also contains robust confidentiality provisions.

But will the employee agree?

For most HR professionals, a swift and smooth redundancy process is the ultimate aim. Employees are more likely to agree to your terms if the severance package is generous, but that is not a possibility for all organisations, particularly at the moment. Offering to waive a non-compete restriction is likely to significantly improve the offer on the table, and in turn the likelihood of the package being accepted.

Other clauses that are worth discussing during negotiations are the non-solicitation and non-engagement of employees' restrictions. These clauses typically prevent the poaching of staff and prevent a former employee offering a job to other employees within your organisation. In agreeing to waive these provisions, you would allow ex-employees to employ other ex-employees which would, again, be seen as a generous gesture in a very competitive market. The same considerations apply - you would want to ensure that restrictions around confidentiality and poaching of clients/suppliers are upheld - but it could be an attractive bargaining chip.

As with most things, there's a legal route and there is a practical one, and these don't always unite. Your employees may have contracts that contain onerous restrictive covenants, which you would be within your rights to enforce - but doing so could pose a significant reputational risk. It is therefore worth asking yourself: what is worse for my company - waiving a contractual clause which may leave the organisation vulnerable to increased competition; or, the threat of poor media coverage and reputational damage because of your inflexible and unsympathetic approach to redundancy?

Only you can decide which outcome your business can weather, and remember that there is often a middle ground which can result in a good outcome for all involved.