Restrictive covenants during COVID-19: are they enforceable?

2020 has been a difficult year, and a number of fintech companies are now faced with the unpleasant task of making redundancies. In a post-pandemic recession, how will employees fare if their contracts contain restrictive covenants which limit their ability to take on new roles, as a valuable freelance developer, for example? Are such post-termination restrictions even enforceable?

Restrictive covenants: what you need to know

Can you enforce such clauses in a post-pandemic world – and should you?

Restrictive covenants are not only commonplace in the fintech sector – regardless of the industry, every business has information that it would like to protect and keep away from its competitors.

Restrictive covenants seek to prevent a new employer benefiting from the use of such information. They do this by prohibiting employees from: working for a competitor (non-compete clause); communicating with and poaching clients and/or suppliers (non-dealing and non-solicitation of clients/suppliers); and poaching employees (non-solicitation and non-engagement of employees). But can you enforce such clauses in a post-pandemic world – and should you?

The current global employment market

Waiving contractual obligations is not something an HR professional would usually be asked to consider. Neither would it be commonplace to have to consider the global job market when thinking about redundancies. But there is nothing “usual” or “commonplace” about the current, post-coronavirus market.  And one thing is undeniable: greater flexibility and freedom are needed if professionals are to weather the tough economic climate.

COVID-19 has taken its toll on the employment market (a recent Chartered Institute of Personnel and Development survey [Labour Market Outlook: Summer 2020] has found that one in three employers in the UK is currently planning redundancies); and many employees are already in a precarious financial position as a result of being furloughed.

Many employees in the fintech industry who have been placed on furlough leave by their employers (companies such as Monzo and Revolut), have been unable to take on freelance developer roles during their furlough leave as a result of restrictions in their employment contracts. Taking on short, project-based roles during this time would have given their incomes and CVs a real boost. Such individuals may not react kindly to similar conditions being imposed following a redundancy of their role. After all, from an employee’s point of view, they are not choosing to leave; their role is being made redundant. Why shouldn’t they be able to seek new opportunities without restriction?

Waiving contractual obligations

If faced with such a dilemma – to waive or not to waive restrictions – it is worth bearing in mind that there are unexpected advantages to leniency. The fact that your company has acted well, particularly during a global crisis, will resonate and be remembered. A willingness to compromise could serve your brand well in the long term.

However, there is also an obvious downside to such an approach. If you are considering redundancies, you are losing staff because you have to – not out of choice. If a former employee moves to a competitor and takes business with them, this could cause further damage to your organisation at a difficult time.

So, what can I do?

Every business is different, but our advice would be to try to seek a middle ground. If an employee’s contract contains non-dealing and/or non-solicitation of client restrictions, and you only waive the non-compete clause, there will be a limit to what the former employee can achieve for a competitor (at least in terms of encroaching on your business) – particularly if their employment contract also contains robust confidentiality provisions.

Imogen Finnegan, Bellevue Law.

In addition, it’s no secret that the smoothest redundancy negotiations are aided by generosity; the more generous the severance package, the more likely the employee is to agree to your terms. At the present time, many HR managers are dealing with tighter and tighter budgets. If your hands are tied when it comes to financial remuneration, consider leniency on the restrictive covenants. Offering to waive a non-compete restriction is likely to significantly improve the attractiveness of the package.

It is also a good idea to discuss any non-solicitation and non-engagement of employees’ restrictions during your negotiations. These clauses typically prevent the poaching of staff and prevent a former employee offering a job to other employees within your organisation.  In agreeing to waive these provisions, you would allow ex-employees to employ other ex-employees which would, again, be seen as considerate in a very competitive market. You would want to ensure that restrictions around dealing/solicitation of clients/suppliers are upheld – but it could be an attractive bargaining chip that will help you bring the matter to a satisfactory conclusion.

Ultimately, only you can assess your company’s priorities, and whether it’s worth enforcing restrictive covenants (particularly in the current climate). Remember that there is often a middle ground which can result in a good outcome for all involved.