Restrictive Covenants for Recruitment Consultants

By Graham Paul, Partner, Dundas & Wilson LLP

As all industry sectors become increasingly competitive, strategies to retain existing customers and clients are at least as important as the focus on new business development.

From the recruitment professional's perspective, this approach manifests itself in the number of employees - and so prospective candidates - who are subject to wide-ranging restrictive covenants in their contracts of employment. These restraints, which might seek to prevent post-termination competition per se or only the solicitation of customers or staff, used to be the preserve of senior sales employees. It is now unusual to find a contract of employment without post-termination restraints.

From the recruiter's perspective, this gives rise to at least two particular issues:-

• Advising clients on the extent, and potential impact, of the restrictive covenants in a candidate's current contract of employment.
• The spectre of the recruitment consultant itself being sued for inducing a breach of contract simply by reason of it facilitating the move that gives rise to a breach of the restrictive covenants.

Litigation against recruitment consultants on covenant issues is still rare in the United Kingdom, but it is increasingly threatened and anecdotal evidence is that some claims are in the process of being brought. It is something that consultants do need to be alive to then - both in terms of giving the client the best service possible and in protecting the consultant itself.

At its most basic, this requires three elements:-

• A proper understanding of the issues.
• Proper due diligence with prospective candidates.
• Clearly defined rules of engagement with clients.

The issues

There are generally four types of contractual restraint that can continue to bind an employee even after his employment relationship has ended:-

• A restriction on him competing with his former employer for a period post-termination.
• A restriction on him soliciting customers, prospective customers or staff for a period post-termination.
• A restriction on him dealing with customers or prospective customers for a period post-termination.
• A restriction on the use or dissemination of confidential information.

The drafting and enforceability issues on these covenants are beyond the scope of this article, but there is nothing inherently unenforceable in the restraints. And so an ex-employee who does act contrary to them may be acting in breach of contract. That means that he could either be the subject of an injunction application (a court order preventing him from continuing to breach), a breach of contract claim for damages or both.

Importantly, it is also unlawful to induce a breach of contract. And it is in this respect that clients and the recruitment consultant itself are exposed. If the client hires a candidate and then puts him in a position whereby he breaches his post-termination restraints it may well be sued for inducing the consequent breaches. And the recruitment consultant itself might also find itself in the firing line: 'persuading' a candidate to take on a role in which it was inevitable that he would be breaching his restrictions.

Due diligence

The risk of being threatened with action may be a risk that clients are perfectly happy to take. That commercial call is very often made. What is important, though, is that the client makes the call having all of the necessary facts to hand.

That requires the recruitment consultant to do the following as a minimum:-

• Make sure that all relevant documentation is obtained from the candidate. Restrictions are often contained in the contract of employment, but that is not always the case. They may also be in side letters, stand-alone contracts, company handbooks, share option grant documents or Severance Agreements.
• If the restrictions are not contained in the client's original contract of employment - and so were introduced during the period of his employment - find out when and how they were introduced. Restrictive covenants generally need something to have been given in return to be enforceable, and so simply being asked to 'sign up to them' is unlikely to be sufficient.
• If the client's employment with his previous employer has ended, understand properly the circumstances in which it did so. As a general rule, an employer cannot rely on restrictions in a contract that it has already breached. So an employee who has been constructively dismissed or whose employer didn't give him proper notice of termination is generally freed from any restrictions.

A proper assessment of any risk will also require the recruitment consultant to have an understanding of exactly what the client's business is and what candidates will be expected to do within it. That though is self-evident, and that need goes far beyond the restrictive covenant issue.

Rules of engagement

And finally, recruitment consultants do need to be aware of the risks of their own exposure, and document properly with both candidates and clients. From the client's perspective, this means making it clear that introductions are made on the understanding that no warranty as to candidates' legal ability to perform duties should be implied from introductions and on the basis that successful candidates will not be asked to act in breach of any restrictions that they are subject to.

As between the recruitment consultant and the candidates, once again the point should be made very clears in all relevant correspondence that the recruitment consultant is not inferring that the candidate is free to take on a particular position by virtue of putting him forward for it. Candidates with restrictive covenants should be given the message that they should seek their own advice on any areas of doubt.

The area of restrictive covenants can be somewhat difficult to manoeuvre around when recruiting, but it is one that needs to be properly addressed by the recruitment consultant in the interests of all of the parties involved.

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