Enforcing restraints of trade – think strategicallyI am often approached by business owners concerned that an employee or contractor is leaving them and is about to take some of their clients. Some of these business owners have some form of a “restraint of trade” in their employment/contractor agreements and some don’t. For those that don’t, there is little that can be done to stop the transfer of clients who want to follow the departing employee. For those that do, there are options.
The difficulty arises when the business owner has allowed the employee to exclusively foster the relationship with the customer. This is most common in professional services businesses such as law and accounting practices and physiotherapy and chiropractic clinics. Whilst the business owner, or their efforts, may have initiated the initial contact with the business by the customer, the customer has subsequently formed a strong bond with the employee. So when the employee leaves, the loyalty of the customer is to the employee and they will seek to follow.
That is, of course, unless the business owner can somehow intervene and provide some sort of incentive for the customer to stay. Strategies regarding customer retention when the business owner is not directly dealing with the customer on a day to day basis is an area of business management to itself. I am obviously not qualified to discuss this but can recommend people who can. The management of customer relationships, in my view, is most important. If the business owner has a stronger relationship with the customer than the employee did then there would probably not be an issue. However, in a lot of businesses this is simply not possible.
Let’s consider this example. Say your employee is about to leave. He has just handed in his 2 weeks notice. You, the business owner, have no relationship with the customer but have a valid restraint of trade in your agreement with this employee. So you, rightly so, tell the employee that he has agreed to a restraint of trade in his agreement and that it is expected he will honour it. Let’s say the employee had 100 customers. Now if you did nothing more, how many of those 100 customers do you think you will retain? I suspect very little if any.
The business owner needs to immediately implement something that is going to give the customer the incentive to stay. Example: in a physiotherapy clinic, offer to the 100 customers a free treatment with another employee in the hope that they will see that there are others just as good as the departing employee. If the location of the business suits the customer more than where the departing employee is going, they might just stay. If the business owner does nothing, or can’t do anything of significance because it’s simply too late, stopping a customer using their preferred supplier of services (i.e. the departing employee) may actually cause your business more harm than good. When the customer contacts the departed employee and is told that he can’t work for them anymore because of “his contract” with you, do you think the customer is going to be happy and want to go back to your business? Probably not. They will probably look elsewhere. Everyone loses.
Therefore, there are other options where the business owner believes they are going to lose the customer anyway.
The business owner can try to negotiate the sale of the value of those customers to the departing employee. The departing employee, knowing that he is bound to a restraint of trade and therefore won’t be able to work for those customers, may agree to pay for this privilege. Payment may be made upfront or over a period of time. It may be agreed that the departing employee pay an ongoing proportion of the revenue received from those customers over time. There are options.
Therefore, business owners should not cut off their nose despite their face when it comes to enforcing restraints of trade. They are a very important tool but need to be used to gain something. If you end up losing the customer and they tell their friends about how they can’t use who they want, you will lose. If you’re thinking at this point “well at least I’ve made the departing employee suffer” then it better be worth it.
Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers
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