When establishing and running a healthcare business, it is essential that business owners protect their interests. This includes limiting the risk of their own employees, contractors and even partners leaving and setting up a business either in competition or otherwise undermining the business.
One way of achieving this is to ensure that suitable restrictive covenants are included in key documentation. There are many circumstances in which these are applied however, they are complicated legal tools, and careful thought must go into their design and implementation.
What are restrictive covenants?
Restrictive covenants are contractual clauses, that limit what an individual can do after leaving a business. This may be at the end of their employment term, retirement from a partnership, agreed terms following a business sale or following the completion of a specific project by a contractor. They help prevent the individual from immediately competing against the business they are leaving or taking other actions that could erode its value.
Several types of restrictive covenants exist, including:
- Non-compete clauses: These prevent an individual from working for a direct competitor or starting a competing business for a specified period.
- Non-dealing clauses: These prohibit the exiting individual from doing business with certain clients or customers, even if the client approaches them first.
- Non-solicitation clauses: These stop the individual from actively soliciting the business’ customers, clients, or suppliers.
- Non-poaching clauses: These prevent the individual from recruiting the business’ existing employees to join a competing venture or their new employer.
Why are they used?
Entering into restrictive covenants can have serious implications on both sides of a contractual relationship. For example, in an employment relationship the employees may be restricted in terms of finding a suitable new role, or an employer may be reliant on the enforceability of these types of covenants to protect their business interests.
From either side of the coin, therefore, entering into these types of covenants should be considered carefully.
Before entering into a restrictive covenant, the main consideration for both sides should be whether it is likely to be enforceable. Disputes do arise, and the courts regularly take steps to enforce these types of covenant. However, this is not a given, and there are some important legal considerations that the courts will take into account when deciding whether to protect the business’ interests over that of the individual’s by enforcing a restrictive covenant.
Enforceability of restrictive covenants
The enforcement of restrictive covenants is often where business owners encounter challenges. While they are intended to protect legitimate business interests, not all restrictive covenants are enforceable in practice. Too often, businesses seek to rely on restrictive covenants that turn out to be unenforceable. In this situation, the business will find themselves with no protection from steps that their former colleague may take in competition.
The starting point in law is that any post-termination restriction is void on the grounds that it is a restraint on trade and denies the right of the individual to earn a living, which is contrary to public policy. However, such restrictions will be upheld and enforced if the business can show that it is:
- Designed to protect legitimate business interests: This might include customer relationships, trade secrets, and the stability of the workforce.
- Reasonable in scope: The provision must be proportionate in terms of duration, geographical area, and the specific activities it restricts.
One of the most common mistakes is drafting overly broad or long-lasting restrictive covenants. For example, if a non-compete clause attempts to restrict an individual from working anywhere in the country for five years, a court may deem it an unreasonable restraint of trade and strike it out.
To increase the chances of enforceability, business owners should focus on creating covenants that are narrowly tailored and justified considering the nature of the business. For instance:
- A non-solicitation clause limited to key clients, with which that individual has had dealings, and for a period of six months on the basis that is the time it would take to transfer those clients’ loyalty to another person in the business, given the number of interactions with a client over that period, may be more enforceable, while a blanket restriction on contacting any client for a 12 month period may not be.
- The geographical scope should reflect the reach of the business. If the business is local, limiting competition to its catchment area is more likely to be enforceable than imposing a nationwide restriction.
The nature of the independent healthcare sector should be carefully considered. For example, a Harley Street clinic is likely to require a very different restriction than a clinic located in a semi-rural commuter belt town. It is important to avoid a disproportionate restraint of trade as that is likely to be held to be unenforceable.
Tailoring restrictive covenants is a careful balancing act of proportionality and what might be enforceable for one individual, may not be for another, even within the same organisation. It is important that sufficient time and thought is given to this at the outset, and revisited on promotions.
In order to be enforceable, there must also be some kind of “consideration” for the individual entering into the covenant. Consideration is the legal name given to payment of any form (this could be monetary or some other benefit). When restrictive covenants are contained within an employment contract, there is usually obvious consideration, a salary associated with employment. Where they are part of a business sale the purchase monies will usually be the relevant consideration.
This is something that can be overlooked where businesses are seeking to implement new covenants at the point that someone leaves the business. For example, an independent healthcare provider may invite a clinician to trial the delivery of their specialty to the established client basis. If this is a popular service and they decide to open their own clinic, it may be too late to implement a restrictive covenant unless that clinician is willing to agree one for which they will require suitable consideration.
How can a business enforce a restrictive covenant?
Disputes do arise where an individual agrees to a restrictive covenant when joining employment, but by the time they leave they feel that the clause is not enforceable, or they simply choose to ignore it.
In those situations, the enforcement of restrictive covenants is done through the courts. Businesses will need to seek an injunction in order to restrict the individual from taking certain steps. For example, a Prohibitory Injunction is the most common and will prevent the individual from doing a certain thing for the duration. Injunctions can be interim (issued as a preventative temporary measure whilst the dispute is considered) or final (permanent).
As well as or instead of injunctions, businesses may also seek ‘undertakings’ which are promises from the individual that certain steps will not be taken in the future, and also damages.
Whilst all court processes are costly and time consuming, injunction proceedings and applications are particularly difficult both in terms of intensity and cost. To avoid this, preventative action is key – by crafting covenants that are both strong and reasonable at the outset, and re-assessing them at appropriate times, you reduce the risk of costly disputes later on. If you are using ‘standard’ restrictive covenants, or are in any doubt about how to tailor restrictive covenants, or need help in enforcing them, it may be time to seek legal advice.
Bronya Greatrex is an associate solicitor in the employment team at specialist healthcare law firm Hempsons.