Musab Hemsi
- Partner
Insights | Employment
Restrictive covenants – our top ten tips for employers and employees
3 August 2022
Restrictive covenants – a recap
In every employment contract (whether set out expressly in writing or orally agreed) there is also always an implied duty to keep employer information confidential during employment. This implied duty extends beyond the termination of the employment, but only to the extent that it protects trade secrets. To protect anything other than a trade secret after the end of the employment contract, you’ll need to include an express contractual term called a “post termination restriction”.
Post termination restrictions, or restrictive covenants as they are sometimes called, often go beyond protecting confidential information. Usually, express clauses (these can be written or oral) try to protect an employer’s confidential information, customer connections, goodwill and workforce. In relation to restrictions they should always be in writing. Restrictive covenants will be used to restrict activities for a limited period of time and within a certain geographical radius.
The typical restrictive covenants found in employment contracts are:
- Non-compete – which seeks or actually prevents ex-employees going to work for a rival employer/competitor
- Non-solicitation – which endeavours to prevent ex-employees seeking to or actually enticing clients and customers or potential clients and customers to move with them, whether the ex-employee is moving to a competitor, or not
- Non-dealing – which prevents ex-employees doing business with clients, potential clients, customers, or potential customers, whether the ex-employee is moving to a competitor, or not
- Non-poaching – which attempts to prevent a former employee from taking fellow work colleagues with them, when leaving, again whether to a current competitor, or not
Enforcing restrictive covenants
To successfully rely on express contractual post-termination restrictions/restrictive covenants, the clauses must satisfy certain criteria. Here are my ten practical tips for those looking to rely on restrictive covenants or alternatively be free of them.
1. Check if the clauses are properly incorporated into the employment contract
To be enforceable, restrictive covenants must be incorporated into the employment contract. Usually, restrictive covenants are introduced at the start of an employment relationship. This is the most obvious way of introduction. There must be an offer, acceptance, and consideration (usually the job itself). Introducing restrictive covenants during employment is less straightforward. This usually requires consent and a pay rise or a one-off payment.
If restrictive covenants have not been properly incorporated, they are unlikely to be enforceable.
2. Think about what your business or your employer is seeking to protect. Restrictive covenants must be designed to protect a legitimate interest
To be enforceable, restrictive covenants must be seeking to protect a legitimate business interest, this is over and above simply seeking to prevent competition.
What constitutes a legitimate business interest will differ from employer to employer, but the obvious examples include trade secrets, processes, price lists, client lists and client relationships. An employee cannot be restricted from joining a competitor simply because they are good at what they do.
3. Carefully consider the duration of any restriction
Assuming that an employer does have a legitimate business interest to protect, a restriction will still only be enforceable if it only lasts the period for which it is needed. This is fact-specific, but it is rare to see longer than three months being enforced.
4. Consider the appropriate geographical radius of the restriction
This is only relevant to restricting an ex-employee from joining a competitor. A non-compete will be unenforceable if the geographical radius is too wide.
5. Be reasonable
Restrictive covenants must be both reasonable between the employee and the employer and reasonable in the public interest. For example, attempting to enforce a restriction on an individual in the field of medical science, that would prevent the development of products which would benefit the public, may not be enforceable.
This is a relatively rare issue, but worth being aware of.
6. Beware of using standard form/template employment contracts
Whether you are issuing employment contracts or seeking to disregard your own restrictive covenants, the devil is in the detail. Issuing a standard form contract to all employees with the same restrictive covenants is almost never the right thing to do unless all that is needed is a deterrent rather than a potentially enforceable clause.
7. Review, review, review
As explained in point 1, restrictive covenants should be provided at the start of employment. They should also be reviewed each time the employee is promoted and/or given a pay rise, to ensure they are still relevant. Not only is this good practice given the likelihood that an employee will be privy to more confidential information as they become more senior and may need stricter restrictions, but also because case law has confirmed that when considering the reasonableness of restrictive covenants, they will only be reviewed against the job title and seniority of the employee at the time they were entered into and not any more senior role they have been promoted into.
8. Think carefully before bringing or facing enforcement proceedings
The remedies available for an employer if it believes a former employee has or intends to breach their restrictive covenants, are:
- injunctive relief
- damages
- declaration
- undertakings
These must be sought in the courts and the management time and legal costs in collating information to seek any of the remedies above can sometimes outweigh the benefit of enforcement.
9. Be aware that the court can only strike out and not amend restriction clauses
Before considering any legal action, an employer must ensure that the clauses in question satisfy the conditions of enforceability. This is because an important and noteworthy feature of restrictive covenants is that the courts will not rewrite a clause to make it reasonable or limit its scope. The courts can however strike out part of the clause, which is deemed unenforceable provided that the remainder of the clause after the deletion requires no modification or adaptation and would not generate a change in the overall effect of the clause. This is commonly called the “blue pencil test”.
10. Watch out for employer breaches of contract!
If an employer terminates an employment contract in breach of contract, for example not paying notice pay, or behaves in a way that entitles the employee to resign and claim constructive dismissal, any restrictive covenants within the employment contract will be unenforceable and the ex-employee is free to take employment wherever they like and deal with or solicit away clients or customers, should they wish. This is because the employer cannot rely on terms in a contract which it has, itself breached.
If you have questions or concerns about any of these ten points, we strongly advise contacting an employment law specialist for advice. You can contact Musab Hemsi or reach out to your usual Anderson Strathern contact if you would like to discuss a specific issue.
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