Employers: How to stop a departing employee from poaching clients

Most employers will have a good sense of the key talent within their organisation – those employees who have the deep client or customer relationships, are the lynchpins of the business and form an integral part of growth plans, writes Dominic Holmes, Partner at Taylor Vinters. But what can employers do to protect their business when talented employees leave?

Well-connected employees are often the most important assets for an ambitious business.  However, they also present a challenge if they leave. They can be valuable commodities in the wider market and therefore more susceptible to approaches from competitors.  Alternatively, they might have plans to set up on their own. When good people walk out of the door, clients are frequently tempted to follow. So what can you do to protect that hard-won business?

Restrictive covenants How to stop a departing employee from poaching clients by Dominic Holmes, Partner at Taylor Vinters
Dominic Holmes, Partner, Taylor Vinters.

The most important port of call is the employment contract. If this does not contain any post-termination restrictive covenants, the employer’s protection is very limited. Perhaps there are some restrictions, but they are the same ones that apply to everyone else in the organisation.

Or they may be hidden away in another document, such as a share scheme or other long-term incentive arrangement. What chance then of making them work? And if the client wants to take its business elsewhere anyway, can you really stop them?

Making restrictive covenants work for your business

The law recognises that employers can restrain departing employees from poaching clients after their employment has ended, but only if the contract goes no further than reasonably necessary to protect “legitimate business interests” (that is, confidential information, client connections and workforce stability).

This means that restrictive covenants stand a much better chance of working if they are considered on a case-by-case basis and tailored to the specific employee’s role. Spending some time to develop bespoke covenants for key staff at the outset is more likely to reap dividends when the employment relationship comes to an end.

In practice, employers should ask themselves the following questions:

What specific threat does the employee pose if he or she leaves? For example, a Sales Director is more likely to have strong client relationships and networks that need protecting, whereas a Finance Director may have much less client interaction.

What type of restriction might be appropriate to counter that threat? A covenant that restricts contact with existing customers or targets may be appropriate for the Sales Director, but less so for the Finance Director. Conversely, the Finance Director may have access to commercially sensitive information (such as budgets, growth plans and financial modelling), which requires a different approach.

What is the minimum level of business protection we need? Can you live with the employee joining a competitor as long as they do not solicit or deal with clients?  Can you limit the covenant to a list of named key clients or prospective targets with whom the departing employee had significant dealings?  Or do you need a non-compete restriction to freeze them out of the market altogether (which is more onerous and, therefore, more difficult to enforce)?

How long should the covenant last?  This will depend on how much time you need to strengthen client relationships, before the ex-employee is allowed to contact them.  As a rule of thumb, 12 months is normally seen as the maximum period for non-solicit or non-deal restrictions (and would rarely be enforced for a non-compete). But would a six-month restriction be enough in the circumstances? Or even three months?

Do existing restrictions need to be updated?  Covenants are judged as at the time they are entered into (and not when the employee leaves).  It is important to review covenants on a regular basis to ensure they are still fit for purpose, particularly if an employee is promoted.

Other practical considerations:

There are a number of other ways to protect your client base, both during and after the employment relationship.

First, keep a careful watch on the use of social media as a business development tool. Many employees develop a strong network of contacts online using LinkedIn or similar platforms, which may be easily transferable to a new role. Consider requiring the employee to use a specific account designated solely for work purposes, to delete the account on termination of employment and to provide password details on request.

Second, ensure that the employment contract contains a garden leave clause. This gives you the flexibility to keep an employee away from clients during the notice period and can be more effective than relying on a non-compete restriction. Remember that any period spent on garden leave should count towards the restrictive covenant period.

Third, if an employee tries to breach a restrictive covenant, act quickly. Although there is no guarantee that it will ultimately be upheld if considered by a court, a well-considered covenant will put you in a strong position to demand undertakings from the ex-employee and their new employer, or negotiate an acceptable compromise.

Finally, if a deal cannot be agreed, use litigation as a last resort. Sometimes it is necessary to ask a court to grant an injunction or award damages. However, it is expensive and time-consuming with no guarantee of success, so choosing the right case to fight is imperative.  Could that time and money be better spent on engaging with your clients and convincing them to stay with you, rather than becoming embroiled in a public spat with your ex-employee and a competitor?

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