Insurance · 8 October 2018

Will I be sued by my old employer if I set up a rival company on garden leave?

If your ex-employer finds out about your new business they may become suspicious of what you are doing

When starting a rival company, how likely is your previous employer to enforce a restrictive covenant? Grid Law founder David Walker assists one reader looking to begin contacting potential clients for a new venture while on gardening leave.

Question

Hi David

I worked for a large IT training company for 16 months and decided to leave and set up my own IT training company. I gave them one month’s notice (as per my contract) and they put me on garden leave.

My company will be a virtual training company so all training will be carried out remotely. My old company, which I worked for, sells mainly classroom-based training, although they do sell some virtual IT training like I intend to do.

I have 1 month of garden leave up to 6 October. Then 2 months remain of the 3-month non-compete clause in my contract.

I’m wondering what I can and cannot do during this time. Should I just sit still and not sell anything, or not send any traceable emails to potential clients for the next two months?

If I do nothing then I might be very low on cash flow so technically it would make it very hard for me not to work.

What are the chances of me getting sued by my old company if they find I’ve sent an email to a company they work with?

The restrictive covenant is not specific in terms of geography but it is in terms of time (3 months).

Ideally, I would like to get something set up so I can start my first training session on 7 December (the day that my covenant expires).

Can my old company restrict me from talking to all companies in the UK or just their clients (they have 1000s), or just the clients I had contact with when I was working with them (which was maybe just 10 large clients)?

When my contract says I’m not allowed to compete does that mean (a) I can talk to their clients but not take any money off them until my covenant is over or (b) I can’t talk to their clients at all until my covenant is over?

What does compete mean? Does it mean “take money from” or “contact at all”?

Any help you can give is very much appreciated.

Thanks

[After exchanging a few emails with the reader, I also reviewed his employment contract so that I could see the wording of the restrictive covenant.]

Read more about restrictive covenants:

Answer

Thanks for your question and all the additional information.

I’ve read the clauses in your contract and on the face of it, it does seem unfair to prevent you from working anywhere in the UK, in any business which provides services which are the same as those provided by your ex-employer. As a very large training company with £50m turnover, they provided a huge variety of services.

However, they have qualified this restriction by saying that you can provide these services with the consent of the board and the board will only withhold their consent so far as is necessary to protect their legitimate business interests.

There are also two more qualifications that make the restriction far more reasonable:

  1. The restrictions only last for 3 months, which is far more reasonable than the 12 months I often see in contracts such as this; and
  2. The restrictions only relate to “Restricted Persons”. A “Restricted Person” is defined in the contract as any clients, suppliers, employees etc. that you had contact with in the previous 12 months. (This answers your question about who the restriction relates to. It’s only the 10 or so clients you dealt with.)

The restrictions on what you cannot do in relation to the Restricted Persons are then very broad. Basically, you mustn’t have any contact with them at all. So, you shouldn’t be emailing them, negotiating with them or doing any work for them until your restrictive covenant expires.

This gives you 3 options:

(1) First, you can write to the board, explain what you intend to do and ask for their consent. You can explain that you have no intention of contacting their clients and highlight the differences between what you intend to do (virtual training) and their core business which is mainly classroom-based training.

(2) Second, you could ignore the restrictions in your contract and start trading with your new business. You will be taking a chance on whether they find out and if they do, whether they decide to pursue legal action against you.

(3) Third, you could wait until your restrictive covenant expires. You are then free of their restrictions and can do whatever you want.

The first option is the best option if you want to start trading prior to your restrictive covenant expiring and you want to avoid the risk of legal action. The biggest problem here is that they may take so long in reviewing and approving your request that the restrictions naturally expire.

Alternatively, they may deny your request.

If this happens and you take the risk and start trading within the three-month period (or you go straight for option two), your ex-employer may start (or threaten) legal action against you.

If they do start a claim, you will have the opportunity to defend it.

To be successful in your defence, you will have to prove that the restrictions are unreasonable and go beyond what is necessary to protect your ex-employer’s legitimate business interests.

We would say that you have the right to earn a living and that this covenant prevents that by unreasonably stopping you from working in an industry you know. We would also argue that it’s completely unreasonable and impractical for you to find temporary employment elsewhere for two months.

If your ex-employer is successful in proving that their restrictions are reasonable, they will then have to prove their loss. If you haven’t poached any of their clients within the 3 month period (and you haven’t done anything within the 3 month period which leads to you poaching their client after the 3-month period has ended) they are unlikely to have suffered any loss and so there will be no value in their claim.

Personally, I think the chance of your ex-employer successfully claiming against you is low as you have already said that you have no intention of providing services to the 10 clients you worked for (the Restricted Persons).

However, if your ex-employer finds out about your new business they may become suspicious of what you are doing. They may threaten legal action if they are concerned that you might be contacting their clients.

This is a risk and dealing with the threats of legal action will obviously take your attention away from your new business.

I imagine that there will be plenty of potential clients you could contact so your safest option is to focus on them. Then, after your restrictive covenant has expired, you are free to do whatever you want.

Best of luck with your new venture and I hope this helps.

Please feel free to email me again if you would like me to clarify anything or if you need any further help with your business.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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