Employment Contracts

EMPLOYMENT CONTRACTS – PROTECTING YOUR BUSINESS

As business owners you normally spend a considerable amount of their own time, money and other resources in setting up and developing their business. You therefore need to protect their investment in their business. You should always have contracts in place with your employees, sub-contractors and suppliers protecting your confidential information. One aspect of this is that as a business only you want to ensure that if it is part of an employee's or sub-contractor's contract that they create designs or come up with any new ideas or processes, then the intellectual property rights in those ideas or processes belong to the business not the employee or sub-contractor. You might think that it is obvious that those rights belong to the business and often you may well be right. You might succeed if the matter went to court, but why chance it?

At Neil Millar & Co, over the years we have seen situations where employees leave a business to set up in business in competition with the former employer, attempting to take customers and sometimes other employees with them. This is particularly prevalent in the current economic climate.

Properly drafted restrictions in the contract of employment (or sub-contractor agreement) will protect your business. Somewhat bizarrely, as far as employees are concerned, restrictive covenants in a contract of employment, in particular, are deemed to be unenforceable as they are deemed to be in restraint of trade UNLESS a court decides that the restrictions are reasonable in order to protect the legitimate interests of the business. You might think therefore that this is spectacularly unhelpful as only a court can decide if any restrictions are enforceable. However, carefully drafted restrictions, taking into account prevous decisions of the courts, can pretty much ensure that it is very difficult for former employees to successfully challenge the restrictions. The mere existence in a contract of carefully drafted restrictions should be enough to persuade a former employee and their new employer, if relevant, that they would be unwise to breach the terms of the restriction.

A carefully drafted restriction usually therefore leads to a quick negotiated settlement of a claim against a former employee who would rather try to come to agreement with the former employer than risk the employer issuing a claim for damages and requesting an order prohibiting the former employee from approaching or dealing with customers / suppliers / employees of the employer.

One area where we have seen the fairly drastic effect of not having these restrictions in place has occurred when we have been acting for senior employees in relation to a proposed management buy out of the business of their employer. On more than one occasion, the proposed buy out did not proceed, usually because the business owner, and possibly his accountant, had a somewhat higher opinion of the value of his business than did our clients, the prospective buyers, and their accountants. Unfortunately, therefore the deal fell through. However, our clients did not have any restrictions upon them in the contract of employment restricting what they could do after the end of their employment. In one case our clients wanted to be fair with their employer and wanted to pay a fair price for the business. They had in fact been running the business for several years. The owner was the managing director and it was his money that set up the business, but in valuing the business he had not taken into account the fact that there were no restrictions on employees preventing them from leaving, setting up in competition and taking customers with them. Ultimately, as they couldn't come to an agreement on price and whilst they didn't want to set up themselves in business, as the proposed buy out could not proceed, they had very little choice in the end other than to set up in business on their own. Not all of the customers went with them but a significant portion did. On the employer's own account of the valuation of the business, that cost the employer one million pounds. So for the sake of spending a few hundred pounds in having a properly drafted contract of employment containing reasonable restrictions, he had cost himself potentially up to one million pounds