In a competitive business landscape, protecting your company’s interests from internal and external threats is crucial.
Three common and challenging scenarios often play out:
- Scenario 1 – Your client hires your employee to join their team without agreeing it with you first. You only find this out after your employee has resigned, completed their notice period and updated their LinkedIn profile. To rub salt into an open wound, the client no longer requires your service as they’ve brought it ‘in house’ from your house, leaving you with the loss of income and the recruitment headache.
- Scenario 2 – Your employee decides to leave and join your biggest competitor, taking what they’ve learned from you along with some key clients.
- Scenario 3 – Your contractor/freelancer decides to undercut your fees and work directly with some of your clients.
These situations can lead to significant financial losses and operational disruptions. Despite hoping for ethical behaviour, the reality of business often demands proactive measures to safeguard your organisation. This short article provides practical solutions to deter and manage these scenarios effectively, ensuring your business remains resilient and protected.
Scenario 1 – Client Poaching
Make sure you have a sensible contract in place with your client that contains a ‘non-solicitation’ clause. In plain English, you want the contract to make it clear that if your client would like to employ one of your staff or contractors/freelancers, they need your permission. If they get your permission, they need to contribute to your recruitment costs to find a suitable replacement. You need to tread carefully here as just plucking a price from the air and putting it in the contract could be unenforceable and treated as a ‘penalty clause’. Instead, you want the compensation to be a true reflection of the cost you have or will incur to replace your employee.
Scenario 2 – Employee turned competitor
Make sure you have an employment contract in place which contains a well-considered ‘restrictive covenant’. In this scenario, you’ll want the clause to make it clear that your employee is not permitted to join a competitive business within a defined period of time.
Contrary to popular belief, restrictive covenants can be enforceable and the courts often enforce them. To ensure they are enforceable, it is worth taking advice on the specific wording i.e. how long the restriction should apply, the realistic impact of the restriction on the employee and the business, whether it’s location or client/competitor specific.
The clearer the restriction, the stronger the deterrent.
Scenario 3 – Contractor/Freelancer turned competitor
Much like your client and employment contract, you’ll need to make sure you have a contractor/freelancer contract in place which contains appropriate restrictions.
For this scenario, you’ll need to make it clear that your contractor/freelancer cannot work for any of your clients directly unless they have your permission.
A point to think about
It’s worth bearing in mind that you can’t have restrictions of this nature in place indefinitely after the contract has ended – there needs to be a reasonable time limit. What is ‘reasonable’ will vary depending on the context and the type of restriction you are using.
If you’d like to understand more about what a reliable restrictive covenant should look like for your business contracts, please don’t hesitate to contact us.
Ryan has helped a vast number of businesses protect and control their intellectual property as well as drafting and advising on consumer and commercial contracts.