Restrictive covenants in employment contracts are an essential tool for seeking to protect a business’s competitive edge, intellectual property and business relationships. However, if poorly drafted or ill-thought through, these clauses can be rendered unenforceable, leaving the employer exposed to potential legal disputes and/or the loss of valuable information and assets. What is a restrictive covenant and why are they important? A restrictive covenant in an employment contract is a clause that limits or restricts what an employee can do during their employment and/or after it ends, in order to protect one or more of the employer’s business interests. Common types of post-termination restrictive covenants found in employment contracts include: A non-compete clause which purports to restrict an employee from doing work of a particular kind for a competing business; Non-solicitation clauses – preventing former employees from soliciting business from persons or organisations with whom they dealt or alternatively had knowledge off during the course of their employment; Non-poaching clauses – preventing employees from encouraging or poaching certain categories of colleague to join them at their new employer; Non-dealing clauses – preventing an employee from providing competing goods or services to a client (even where the client was the one to initiate the approach to the employee); Interference with suppliers – Restricting employees from taking steps to encourage or induce a supplier to reduce or cease their supply to their former employer. Employees who leave a business often had access to confidential information such as business plans, intellectual property and/or customer/client lists all of which are often of high value and importance to a business. Although employees must comply with certain terms that are implied into every contract of employment, these are limited in nature and do not generally extend to the period after termination of the contract (except in relation to trade secrets). Therefore, having express restrictive covenant clauses in place in an employee’s contract are critical to help: Reduce the risk of an employee exploiting confidential information and/or personal connections acquired during their employment for their own gain (or on behalf of a competitor) upon their exit; and/or To provide an employer with a legitimate basis upon which to take legal action to force an employee to comply with their obligations whether by way of an injunction and/or a claim for damages in the event of a financial loss to their former employer. The importance of careful drafting and issues with enforcement Restrictive covenants in employment contracts are generally more difficult to enforce than those found in commercial agreements, such as share purchase agreements and joint venture agreements. This is because of the relative inequality of bargaining positions between the employer and employee. When deciding on whether to enforce the restrictions relied upon, a Court will consider all of the relevant circumstances on a case by case basis. An employer cannot restrict an employee simply because they might wish to do so. Individuals have a general right to work and earn a living and any restrictions on that right must therefore be reasonable, considered and proportionate if they are to stand any chance of being upheld. If the Court considers that a restriction goes too far, it can declare the clause to be void and it will become unenforceable. In balancing the competing interests of the employer and employee the Court will apply the “reasonableness test”. This involves their considering whether a clause is reasonable based on the circumstances at the time that the contract was entered into. Care must be taken when drafting covenants to ensure that their meaning and scope is clear and that, when applied, the clauses will operate effectively to protect an employer’s legitimate business interests. However, the restriction should go no further than is reasonably necessary to protect the relevant interest or interests relied on. Amongst the factors that will be considered in deciding whether a restrictive covenant is reasonable and therefore enforceable or not is the employee’s seniority and status. Generally, the more senior the employee, the easier it will be for the employer to enforce a more onerous restriction. Other factors will include the duration or geographical area of the restriction. If a restriction is deemed to be too wide (for example a geographical area covering the entire world) or is longer than is reasonably required to safeguard the interest it will not be enforceable. It is also important to ensure that an employee returns a signed version of the contract containing the restrictions. A common mistake employers make is not obtaining and then retaining a signed version of the contract from an employee. The absence of a signed contract makes it incredibly difficult (if not impossible) to rely on a restrictive covenant. How can Morr & Co help? It is always advisable when drafting contracts of employment to seek legal advice to ensure that they are drafted correctly so that the risks of them being unenforceable (and therefore not providing the protection required) are minimised. If you have any questions or would like any further information on restrictive covenants, please do not hesitate to contact our Employment team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you. Disclaimer Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position. Authored by Francesca Wild Senior Associate Solicitor Message Tags Insights Corporate Insights On this page Related Stories UK employment law reforms: key changes for employers Employment Rights Bill: latest updates View more Contact our team today to find out more get in touch
