Guides & Advice

Understanding Restrictive Covenants

Published: 21st July 2021
Area: Employment

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.

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 is a restrictive covenant?

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
Making sense of restrictive covenants in employment

Earlier this year, there was a 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.

We take a look at some of the most Frequently Asked Questions around this subject.

What types of restrictive covenants are there?

 

  • Non-competition – this type of restrictive covenant restricts the former employee from working for a competitor, or setting up a competing business.
  • Non-solicitation – restricts a former employee from approaching clients and prospective clients once they have moved to a new business or set up their own business.
  • Non-dealing – restricts any contact between the former employee, clients and prospective clients, even if it is not the employee initiating that contact.
  • Non-poaching – restricts the former employee from approaching their previous colleagues to move to their new employer or their own 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.
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 goes 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.

Get in touch

Receiving appropriate legal advice will assist in taking appropriate steps to ensure the covenants are tailored to the business circumstances and enforceability the key objective.

For accurate advice on restrictive covenants, speak to a member of our employment or litigation team.

 

Our employment team is ranked as a Leading Firm in the Legal 500 2021 edition.

Our updated guide to recovery and resilience covers everything you need to navigate your business out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

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