What are restrictive covenants?

A restrictive covenant is typically a clause in a contract which prohibits an employee from doing some or all of the following for a defined period after they have left the business:

  • competing with their ex-employer;
  • soliciting or dealing with customers of the business;
  • poaching certain employees;
  • interfering with supplier arrangements

People are at the heart of any business and form an important resource which needs protecting. But when employees move on, it is important to have the necessary protection in place to ensure that there are no adverse effects caused by their departure.

Whether an employee has left an organisation and is looking to set up on their own or join a competitor, a departing employee is likely to have acquired an insight into an employer’s confidential business operations, often helping them gain an unfair competitive edge.

An employee attempting to divert customers, poach staff or set up a rival business in competition are all matters that can be covered by restrictive covenants within their employment contract and you may be entitled to obtain injunctive relief to prevent a breach and/or damages for any business already lost by their actions.

 

What types of restrictive covenants are there?

Non-solicitation of clients/ customers

These covenants prevent an employee from attempting to persuade clients or customers to move their business. Usually, solicitation occurs when a former employee contacts a client to encourage that client to move its business from the former employer.

Non-dealing with clients/ customers

Like non-solicitation clauses, except these go further and try to prevent the employee from dealing with clients or customers even where they didn’t try to solicit them. These are more restrictive than non-solicitation covenants and therefore are at greater risk of being found to be unenforceable.

Non-competition

This covenant seeks to prevent an employee from working for a competitor for a set period of time after termination of their employment. This kind of covenant can typically span between 3 – 12 months depending on the ex-employee’s seniority and/or access to confidential information.

Non-poaching of employees

These restrictive covenants prevent an employee from approaching former colleagues and persuading them to join a new business.

Garden leave

Not technically a restrictive covenant, but the effect is similar in that it allows employers to keep employees out of the market by preventing them from working during their notice period.

 

So when is a restrictive covenant enforceable?

Restrictive covenants are a restraint of trade and anti-competitive. As a result, as a general principle, courts will not enforce restrictive covenants where the scope of the restrictions is wider than the employer needs to protect its legitimate business interests. For this reason, it is usually better for an employer to have narrow covenants that are likely to be enforceable, as opposed to wide covenants which may look like they offer fantastic protection but which are actually unenforceable.

The courts will consider a whole host of factors in this regard, including the following:

  • Does the restriction last for a reasonable amount of time?
  • Is the restrictive covenant limited in geographic scope? – The wider the geographical area in which the employee is prevented from working, the harder it will be to justify the clause (albeit increased globalisation has made this factor less important in many industries).
  • Is the scope narrowly drafted and does it reflect the specific circumstances of the employment?
  • Did the employee receive a benefit in return for accepting a restriction?
  • The seniority of the employee.
  • Did the employee have access to confidential information or clients?
  • The loyalty of customers in the relevant market.
  • The standard industry practice in the context of a reasonable restrictive covenant.

Whether the restrictive covenant was reasonable at the time the contract was entered into i.e. when the employment started or when a new contract was signed by the employee. This is why it’s so important to update covenants as employees progress through an organisation.

 

A recent example case on restrictive covenants

Law by Design Ltd v Ali [2022] EWHC 426 (QB) – Ms Ali was an experienced employment lawyer who worked for Law by Design Limited, which was a niche practice based in Manchester. The practice provided advice to clients within the healthcare services sector, particularly specific NHS entities in the North West of England and one in Hertfordshire. The majority of Ms Ali’s time was in the provision of employment advice to those entities.

Ms Ali’s service agreement, including the covenant, had been agreed between the parties as recently as 2021, less than four months before Ms Ali resigned.

The restriction required Ms Ali not to be “involved in any capacity with any business concern which is (or intends to be) in competition with any Restricted Business”. Restricted Business was defined as “those parts of the company with which the employee was involved to a material extent in the 12 months before termination”

The High Court found the non-compete covenant in the contract of employment enforceable.

The High Court noted that the operation of the covenant was limited to parts of the firm in which Ms Ali was involved to a material extent proximately to her departure from the firm. This device ensured that the covenant was reasonable in the scope of its operation. In relation to duration, 12 months was considered reasonable by the court (as opposed to a shorter period) because 12 months would be reasonably necessary to find, successfully recruit, and then train/integrate a lawyer in a small firm working in a niche area in Manchester.

 

Making sense of restrictive covenants in employment

Previously, there has been consultation specifically on “non–compete” restrictive covenants (i.e. those that stop an ex-employee from working for a competitor of their ex-employer) that came to an end in February 2020.

Despite these non-compete clauses being commonplace in employment contracts, particularly those for senior employees, they can be controversial.

They can be seen to be fundamentally anti-competitive and in some instances can effectively prevent an individual from earning a living, particularly if an employee’s skills and the market in which their employer operates is such that if the individual was to move jobs it would, short of a complete career change, inevitably result in them joining a competitor.

As such the courts have taken a very uncompromising approach to their enforceability.

As a result, the government outlined various proposals to address the issues experienced with non-compete clauses. The results of the consultation are currently being analysed by the government but it is possible that any reforms will be included in a new Employment Rights Act.

 

How can I make sure my restrictive covenant is taken seriously?

There are a few things to consider:

  • How restrictive the covenants are – a tribunal will examine the length, geographic coverage and areas of business within a covenant to ascertain whether they do no more than is necessary to protect the “legitimate interests” (see below) of the business. A covenant that does more than is necessary is likely to be deemed unenforceable.
  • Legitimate interests of the business – the burden of proof will lie with you as the employer to show why the breach of any clause in the employment contract would have a detrimental impact on the future of your business and why a lesser restriction wouldn’t have been sufficient.
  • Job role –Any change in a job role should also include a review of any covenants already included within an employment contract to ensure appropriateness.
  • How enforceable are restrictive covenants?

It depends on the nature of the covenant – they need to be carefully drafted. Restrictive covenants that are tailored to the individual role will work in favour of the employer should they ever be challenged or disputed.

It also depends on the specific circumstances in each case, including the nature of the business, the type of work the individual carries out and the nature of the competing business. There are no hard and fast rules.

 

Will remote working affect a restrictive covenant?

It won’t generally affect the legal enforceability of a restrictive covenant, but the practical implications for employers are significant.

One of the issues that go hand in hand with restrictive covenants is the misuse of confidential information by employees (e.g. stealing customer lists before leaving to join an employer), and it is much harder for employers to police employees in this regard when they are mostly if not entirely, working from home.

 

Questions about restrictive covenants?

We have an impressive reputation for dealing with such issues and to ensure our clients remain protected we always have a clear strategy at the heart of everything we do.

Once we understand your commercial objectives, we guide you through the process of how to gather supporting evidence for your case in order to advance your position and recover any damages.

We have been commended by clients for our ability to deal with matters commercially and sensitively. We recognise that commencing litigation in haste may not be the best solution when an open dialogue or alternative dispute resolution methods could provide a quicker and more favourable solution.

If you would like any advice on the drafting or enforcement of restrictive covenants, please contact a member of the employment team.

Get In Touch

Lubna is an experienced employment solicitor who advises a wide range of businesses on their HR issues. Lubna also specialises in tribunal litigation.

Matt’s expertise cover all areas of Employment law. He has considerable experience of advising clients on complex employment litigation, senior hires and exits, large-scale redundancy exercises and complicated TUPE issues.

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Published: 11th May 2022
Area: Corporate & Commercial

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