UK: HOLD ON TO YOUR ASSETS.

UK: HOLD ON TO YOUR ASSETS. - A frisson of alarm went through the business world when the Saatchi brothers walked out of the company they had founded, taking with them a clutch of senior executives and clients. This multiple departure amply demonstrated

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Last Updated: 31 Aug 2010

A frisson of alarm went through the business world when the Saatchi brothers walked out of the company they had founded, taking with them a clutch of senior executives and clients. This multiple departure amply demonstrated the management mantra that a company's chief assets are its people. When an executive departs with market information or customers, along with his P45, the results can be very costly.

The standard defence against this threat is a restrictive covenant

in the employment contract forbidding employees from taking competitive advantages with them when they change jobs. But in the real world most restrictive covenants are so drafted they would never be upheld in a court of law, says Guy Abbis, an employment lawyer with Bristol-based solicitors Veale Wasbrough. 'Restrictive covenants tend to be put willy-nilly into everyone's employment contract, from the managing director to the tea-lady, which makes them universally inappropriate,' says Abbis. 'Each covenant must be tailored to the individual's job and the particular proprietary interest that the employer is trying to protect.'

In the past the courts have tended to reject many restrictive covenants, as being unfair. And the cost of litigation, plus the slim prospect of success, deterred companies from going to court. But they continued to write restrictive covenants into the contract. Richard Galletly, group employee relations manager at the Bristol and West Building Society, for example, considers that these are essential in areas like personal finance, where managers hold confidential information on clients. Although the society tailors every covenant to the job involved, Galletly accepts that many of them would be difficult to enforce. Nevertheless 'they make the individual aware that he is expected to abide by certain regulations'.

Alex Sandberg, chairman of City PR firm College Hill, regards the restrictions as necessary to protect his company's investment.

'We put a lot of time and money into training our staff of fee-earners and we don't want that expertise taken to our competitors,' comments Sandberg. 'But if an employee wants to move on, nothing is going to keep them. A covenant must be drafted in the expectation that you will have to act upon it, so brief your lawyer that it must stand up in court.'

Employment contracts are designed to protect both parties and imply mutual responsibilities, says Wendy Smith, finance director of Cordiant, formerly Saatchi and Saatchi. 'A restrictive covenant isn't trying to prevent the employee from working elsewhere but to ensure that assets stay within the company. It maintains the principle that the employee must not harm the business.'

So called 'garden leave', where a departing employee works out his notice at home, is often used used for this purpose because it is easier to enforce - since the individual is still on the payroll. Although officially he is simply spending more time with his lawn-mower, the aim is to keep him out of the market for a certain period. Senior staff at Saatchi and Saatchi who tried to follow the founding brothers out of the door were given garden leave by their employer, but the courts threw out an attempt to extend the initial period as unreasonable.

'Reasonableness' is the legal test of a restrictive covenant. The value of much financial and commercial information has a relatively short shelf-life, maintains David Gibson, company secretary of Rexam, the printing and packaging multinational. 'You can reasonably restrict senior executives from competing or soliciting customers and employees for six or 12 months, but after that period it's probably unenforceable.'

A growing number of court cases involving restrictive covenants points to rising confidence among employers that they can be enforced. But Gibson finds that a written reminder to an employee usually has the desired effect, and it's cheaper than going to court. As Lord Denning observed, 'the power of restrictive covenants is the fear of litigation which they inspire'.

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