Starting a business after redundancy?

Why you should check your employment contract for restrictive covenants,

David Lewis saw his redundancy coming. His employers were struggling to find work and when he had the chance to start his own business with family backing everyone said he would be crazy not to take it.

Everyone, that is, but the bosses who had made him redundant. They were quick to remind David that his employment contract contained a restrictive covenant agreement forbidding him to start a competing company.

Truth
“The truth is they didn’t want me, but they didn’t want anyone else to employ me,” David says. “There were some very strong legal letters flying about. Being stopped from going on my own after being made redundant hadn’t entered my head.”

After all, when you move to another job or perhaps start your own business after redundancy it surely makes sense to do something you know and understand. But legal experts are quick to point out that if you stay in the same line of work you could be seen as a competitor by your previous employer, who might be within his rights to go to law in an attempt to stop you becoming a business rival.

“Employees are now more than ever ready to enforce restrictive covenants because of the difficult economic climate,” says business solicitor Roger Platt. “The last thing they want in a competitive market is for an employee they have trained and invested in to start stealing their clients.”

Most restrictive covenants are for six months or a maximum of a year, depending on the seniority of the staff being made redundant. In simple terms, a restrictive covenant means you can’t go after any of your previous employer’s clients or use your knowledge of their products to damage their business.

If redundancy could be on the horizon, it makes sense to see if your employment contract does contain a restrictive covenant agreement or post termination restriction before you make any definite plans for the future. Legal experts point out that there are three main kinds of restrictive covenant - those that:

• Prevent you approaching clients of your former employer.
• Prevent you from poaching employees.
• Prevent you from competing against your former employers.

The last is reckoned to be the most difficult to enforce and will usually only be upheld by the courts if it is regarded as reasonable.

As soon as you get the terms of your redundancy package, experts say you must seek advice from an experienced employment solicitor. “While covenants are sometimes unenforceable, being sued is a costly way of finding out,” Roger Platt says.

“Most employers do expect a redundancy victim to try to negotiate better terms and often a employer is more concerned about protecting trade secrets than fending off new competition. If this is the case, there is often room for negotiation over a restrictive covenant.”

Even when a restrictive covenant is in operation, redundancy victims planning their own businesses are allowed to research and prepare for the time when the restrictions are lifted.
“It’s good sense to part on good terms with your employers after a redundancy,” says London legal consultant Sarah Graham. “That can affect their attitude to your future business plans and the extent they are prepared to waive a restrictive covenant in certain circumstances.

“Recent cases have shown that enforcing covenants can be a long and expensive process if a court decides they go further than necessary to protect a company’s business interests in terms of duration or geographical area. A restrictive covenant can’t simply stop you working for a competitor, as that would be an illegal restraint of trade and would almost certainly be thrown out of court.”

Folly
Whatever the circumstances, experts agree that it’s folly to ignore a restrictive covenant, which can carry a lot of legal weight. In extreme cases, an ex employer can not only get a High Court injunction to close any business you’ve started, but could even claim damages for loss of income caused by you stealing their customers.

“Where employees often go wrong is believing that what they have created during their employment belongs to them rather than the employer, but this is not the case,” Sarah Graham explains.

“Everything that you create in the course of your employment belongs to your employer. It’s fine to walk away with the skills and experience you have developed as part of your job, but leaving with anything more, such as client lists or business plans, could land you in deep trouble.”

If you leave your previous job with a restrictive covenant, experts urge you to mention the covenant to your new employers, so that they are aware of the situation and don’t ask you to do anything that might be a direct breach of it.

Roger Platt adds: “Your new company probably have something similar themselves and will understand the situation. They will probably let their lawyers look at the covenant if they want the new employee to do anything that might be a problem.”

Consultants say that very few restrictive covenant cases involving redundancy victims get as far as court. A typical recent case involved a sales executive, made redundant, who was approaching former customers and attempting to obtain business for his new employer.

A solicitor involved in the case said: “The former employee’s contract had contained post termination restrictions, which we believed were enforceable. We demanded undertakings from the ex employee and his new company to avoid injunction proceedings and after an exchange of robust correspondence these undertakings were eventually given and the original company lost none of their customers.”

Of course, redundancy victims have similar access to the law if they think a restrictive covenant is unreasonable or unfair - as in the case of a recruitment executive who found, on being made redundant, that he couldn’t approach former clients for two years.

He explains: “A specialist solicitor came to the conclusion that two years was an unreasonably long ban and would not be enforced by a court. As a result, the restriction was eventually reduced to six months on the understanding that if I started a rival business it would be in another part of the country. I had planned to do this anyway and everyone was saved a lot of money and aggravation.”

Frustrating
David Lewis bit the bullet and stuck to the terms of the restrictive covenant that prevented him from opening a rival business for six months or approaching former clients or colleagues for a year.

“It was the most frustrating time of my life,” he remembers. “But it meant that we had plenty of time to prepare and when the time limit was up we were ready and raring to go.”

Today, three years on, David has offices in London and New York, 17 employees and a turnover of over a million pounds. His former bosses are currently among his customers.
Are his key employees under restrictive covenants? “You bet,” he smiles. “One thing I’ve learned from all this is that you can do without unnecessary competition.”

Top tips

• Check your employment documents, so that a covenant doesn’t take you by surprise and you can prepare to negotiate.
• Try to leave on good terms. Who knows, your former employers may eventually become customers.
• Don’t leave with client lists or confidential information.
• If in doubt, seek legal advice. Lawyers charge £200-£400 an hour, but it could be money well spent.
• Discuss any covenant with your new employer. Certainly don’t hide it from them, as that’s asking for trouble.