Understanding restrictive covenants in employment contracts
When an employee leaves a company, there is the risk that they could take advantage of company information such as client details, confidential information, and details of key employees.
They may use this information to benefit their new employer or to set up their own business, potentially to the detriment of their previous employer. In order to protect a business, employers may seek to incorporate post-termination restrictive covenants into their employment contracts or service agreements.
What are restrictive covenants?
Essentially, restrictive covenants prevent employees from engaging in certain activities following the termination of their employment. They commonly take the form of restrictions on competition with the employer, the soliciting (and dealing with) former customers and clients, and the poaching of former employees.
Types of restrictive covenants
The most common restrictions included in employment contracts are:
Non-competition – these prohibit the employee working in a business in which the employer is engaged, for a specified number of months and sometimes within a certain radius of the employer’s premises
Non-solicitation – these prevent the employee from seeking business from clients/ customers of the former employer
Non-poaching – this clause will prevent the employee from persuading other employees to move to their new employer with them
Non-dealing – this prevents an employee from dealing with former clients, customers, or suppliers of the employer even if the client approaches the employee.
Are they enforceable?
It is a common misconception that restrictive covenants in employment contracts are not enforceable. If an employee is in breach of their restrictions and the court decides that the restrictions are necessary and correctly drafted, the employer could be awarded an injunction in order to stop the employee from carrying out certain actions.
The courts, however, will not enforce a restrictive covenant if it is seen as being too wide and/ or in restraint of trade.
In order for a restrictive covenant to be enforceable:
- The employer must have a legitimate business interest to protect. This includes trade secrets or highly-confidential information, trade connections (for example customers and clients) and the employer’s interest in maintaining a stable and trained workforce
- It must also be reasonable in time and must be no wider than necessary to protect the employer’s interest.
In order to ensure it is not too wide certain factors must be considered:
- The extent of activities that the employer is aiming to restrict.
- The length of time the restriction is imposed for must be carefully considered. A restriction that lasts longer than 12 months is unlikely to be deemed reasonable.
- The geographical area of any restriction. If the radius of the restriction is too large, then it is unlikely to be enforceable.
- Restrictive covenants must also be relative to the employee and must only be imposed if the employee has knowledge of the information or contacts that the employer is trying to restrict.
It is vital that employers protect themselves at the outset and ensure they include well-drafted restrictions if there is a risk that the employee may use confidential information or contacts after their employment has ended. Some key takeaways are:
- Do the restrictions cover a legitimate business interest?
- Are the restrictions wider than is reasonably necessary to protect the business interests?
- Are the restrictions reasonable in time and area?
- Are the restrictions appropriate for the particular employees?
See our page on restrictive covenants for more information.
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