Restrictive covenants in practice

Blog | Employment
Published: 11th May 2022
Area: Corporate & Commercial

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What are restrictive covenants?

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.

Restrictive covenants are clauses that are incorporated into a contract of employment that seek to restrict the actions of an individual after their employment has terminated. They play an important role in protecting an employer’s commercial interests.

Broadly speaking, restrictive covenants fall into the following categories:-

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.

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 case

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 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.

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

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

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