How to Handle Restrictive Covenants

Financial News, August 24, 2003 | Go to article overview
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How to Handle Restrictive Covenants


Byline: Sarah Butcher

Signing a new contract of employment may not seem the appropriate time to be thinking about leaving. But according to employment lawyers, this is just what you should be doing. If not, you risk being hampered by restrictive covenants when it comes to moving on.There are four varieties of restrictive covenants: non-compete covenants, non-solicitation covenants, non-dealing covenants, and covenants forbidding the solicitation of employees. They all restrict the freedom of former employees to do their own thing, but in subtly different ways.

For example, non-solicitation covenants state that former employees should not solicit their former clients for a competing business. But non-dealing covenants require that former employees should not have any dealings with former clients.

For a specified period, non-compete covenants, prohibit former employees from working for competing firms. Non-solicitation of employee covenants prevent leavers from poaching former colleagues.

Covenants are typically incorporated in employment contracts, hence the need to watch what you sign. Mark Watson, an employment partner at solicitors at Fox Williams, says they are widespread in investment banking: 'Most trading and client facing roles are covered by restrictive covenants, at both junior and senior levels of the firm.'

Watson says non- solicitation of employees, and non-dealing covenants are most common in banking roles. Team moves, for example, are complicated by rules preventing the solicitation of employees. 'If you openly seek to take your team with you, you will be in breach of your contract and duty, with potential financial consequences', Watson cautions.

However, covenants may be less restrictive than they seem. Lawyers say banks are frequently loathe to enforce non-dealing and non-solicitation covenants for fear of irritating clients. Even if they are willing to fight their corner, David Dalgano, an employment lawyer at law firm McDermott Will & Emery, said courts have decided that most covenant decisions are unenforceable.

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