Employment restrictive covenants
Mon 2 October 2023
Employment restrictive covenants, also known as post-termination restrictive covenants, are clauses in employment contracts that restrict an employee's activities after they leave. Including suitable restrictive covenants is a key way to protect the employer's business interests, such as confidential information, customer relationships, and trade secrets.
Employers need to carefully consider the need for restrictive covenants and only include them in employment contracts where they are necessary to protect legitimate interests and reasonable in duration and scope. We advise employers on the best and safest approach, draft appropriate covenants and also assist where employees are in breach of restrictive covenants.
There are 3 main types of employment restrictive covenants:
- Non-compete covenants - to prevent an employee from working for a competitor for a specified period of time.
- Non-solicitation covenants - prevent an employee from soliciting or poaching customers or clients of their former employer for a specified period of time.
- Non-dealing covenants - prevent an employee from dealing with former clients or customers of their former employer for a specified period of time.
Will your covenants be enforceable?
Employers must have a legitimate reason to justify restrictive covenants if they get tested in a legal dispute with the employee. The covenants must also be reasonable and proportionate to the employer's legitimate interests. Courts will consider the following factors when deciding whether to enforce a restrictive covenant:
- The nature of the employer's business - Businesses that rely on confidential information or customer relationships are more likely to have enforceable restrictive covenants.
- The employee's position and experience - Employees with access to confidential information or who have developed customer relationships are more likely to be subject to restrictive covenants.
- The duration and geographical scope of the covenant - covenants that are too broad in duration or scope are more likely to be unenforceable.
- The existence of an alternative remedy - if the employer has other ways of protecting its interests, such as non-disclosure agreements, then restrictive covenants are less likely to be enforceable.
Practical checklist for employers
- Ensure that your restrictive covenants are reasonable in duration and scope.
- Obtain legal advice before including restrictive covenants in employment contracts.
- Review and update your employment contracts – roles and positions change over time. If there is a dispute about whether a restrictive covenant is reasonable, the court will consider reasonableness at the time the covenant was included. With an employee who was junior at the time of joining, this can create risk for employers. As employers become more senior, restrictive covenants may be more justifiable so when promoting employees, employers should look to negotiate new or updated or restated restrictive covenants.
- Consider other ways to protect your business – an alternative way to focus employees minds on the consequences of competing is to lock them in with shares which include bad leaver provisions. Put simply, if the employee leaves and competes or poaches customers or colleagues, he or she will lose valuable shares.
- Understand that your ex-employee may not be acting alone – do you know whether the ex-employee is acting alone or is he/she supported by a competitor seeking to steal your customers or staff? If the latter, the competitor may have agreed to indemnify your ex-employee against any liability for breach of covenant. Employers often think that the threat of legal action will intimidate the ex-employee and they will co-operate and comply. This is not necessarily the case.
- Recognise that claiming damages is never straightforward – sometimes employers will also sue a new employer competitor who the ex-employee is working for, for inducing breach of contract. In order to succeed, the usual rules of proving loss will apply under English law and so you shouldn’t assume this will be straightforward. It may not be in your best commercial interests.
How we can help
If you want to protect your business against threats when employees leave, we can advise on all the options, legal and commercial and can also assist if an ex-employee is breaching restrictive covenants or the terms of their garden leave. Please do get in contact.