Restictive covenants: how can employers assess their losses?

How much should employers expect to recover when an employee leaves the company, breaches contractual restrictive covenants and, for example, solicits clients, poaches staff, uses confidential information or joins a competitor?

Typically, a degree of secrecy will be involved and the breach may not become apparent for some time after the event. Consequently, it can be very difficult for employers, and the Courts, to calculate financial losses incurred by employers.

Principles established outside of employment law may provide the answers. In a recent employment case the judge referred to a decision in an old land dispute case whereby the judge awarded an amount which, he estimated, would have been sufficient to negotiate a relaxation of the covenant.

Accordingly, where former employees were found to have breached restrictive covenants and because the employer could not easily identify the financial loss, the employment law judge found that it would be fair for the employer to have the option to recover damages based on the amount which might reasonably have been demanded for releasing the employees from their restrictive covenants.

Moving forward, this judgement potentially simplifies the calculation of losses for breaches of restrictive covenants. Complicated assessments of profits may not need to be made. Instead, judges will have the power to award what would seem to be an appropriate amount in the given circumstances.

It is noteworthy, however, that this approach may not always be followed by the Courts.  Some case law suggests that this approach may even, at times, be out rightly avoided, particularly where the employer’s conduct is poorly regarded by the Courts. Although we may be moving towards a situation where assessing loss can be simplified, cases will still need to be considered on an individual basis with close scrutiny of all relevant factors.

For more advice on restrictive covenants call 01273 236 236 to speak with a member of the Legal Team.

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