Effective Enforcement of Restrictive Covenants

Manisha Modasia, Associate

A Case Study on Restraint of Trade in the Recruitment Industry

Restraint of trade or more commonly known as restrictive covenants, play an important role in employment contracts to protect an employer’s longstanding client relationships and business contacts.

You would think that the recruitment industry and agents, in particular, would be experienced in looking for such clauses in employment contracts before promoting, encouraging or assisting a potential candidates move, right?

Not on this occasion. Kuits were instructed to assist a well-respected national recruitment company in a specialist hospitality sector where one of its recruiters had terminated his employment in order to work for a direct competitor.

As with all restrictive covenants, the first steps that we needed to consider was the fine line of balancing the recruiter’s career and freedom to work within the specialist industry sector with the recruitment company’s legitimate interest in protecting its business. Luckily, the well drafted restrictive covenant only excluded communication with clients of the recruitment company where the recruiter himself had been the relationship manager and with whom he had direct involvement in the short period before the termination of his employment.

The restrictive covenant specifically caught the circumstances where two days after starting the new role with his new employer, a meeting was organised with a former candidate at a well-respected restaurant where he worked and part of the management team together with his new employer.

Kuits carried out due diligence on the employment contract and examined the evidence of a breach, gave advice to the client, drafted letters before an injunctive action against the recruiter and against his new employer requesting undertakings, a legal promise to comply with the restrictive covenants, otherwise injunctive action would become necessary. Within 48 hours of instruction such correspondence and undertakings had been sent.

Within 7 days there was an acknowledgement from both recruiter and his new employer which included a desire to enter into undertakings, including the reimbursement of legal costs incurred by our client for having to take such action. The contact with the former candidate was an oversight and there has been no intention to solicit away from our client the business that it had built up. Both recruiter and new employer agreed to follow the terms of the restrictive covenant for the remainder of the 6 months, although it was not only an expensive exercise for both, its unlikely to have made the recruiter popular with his employer.

We admit, not all enforcement of restraint of trade clauses proceed so smoothly. It is rare that in reaching a settled agreement in the form of undertakings that you will also recover the legal costs incurred to that stage. Sometimes you hear nothing from either the ex-employee or the new employer and so are forced to consider the pros and cons of taking legal action against either of them. On other occasions poor drafting of restrictive covenants in employment contracts can affect your prospects of success.

For more information contact Manisha Modasia, an Associate in our Dispute Resolution team on 0161 832 3434 or at info@kuits.com