Essentially, a restrictive covenant is a contractual term that prevents ex-employees from competing with your business, and/ or prevents former employees from working with customers of your business, for a period of time after the employee has left the business. For example, you might wish to include a term in a new employee’s contract that they are not permitted to solicit your business’s clients for a period of two years following their employment. These terms are included in the employment contract, and come into play when either party terminates the contract. Restrictive covenants are a vital tool in protecting business knowledge and connections.
There are four main types of restrictive covenants:
- Non-competition covenants (also known as “non-competes”). These ensure that an ex-employee does not work for a competitor.
- Non-solicitation covenants. These prevent an ex-employee from approaching your clients, or other parties you work with, such as manufacturers.
- Non-dealing covenants. These are slightly more restrictive than a non-solicitation clause, preventing the ex-employee from working with your business connections, even if they approached the ex-employee.
- Non-poaching covenants. These restrict ex-employees from encouraging their former colleagues to join them at their new employer, or to work with them in their new business.
How do I ensure that a restrictive covenant is properly drafted?
A restrictive covenant will not be enforceable if the employee’s activities are too tightly restricted. If the covenant is challenged, the onus is on the employer to show that the covenant is sufficiently narrow. It is, therefore, very important to ensure that any restrictive covenant is properly drafted.
The key question in ascertaining the enforceability of a restrictive covenant is whether it is reasonable. It must protect legitimate business interests but restrict the ex-employee’s activities no further than is necessary to do so. Legitimate interests include protecting business connections and confidential information, and ensuring that your business’ strategic plans are not made known to competitors. A restrictive covenant cannot be upheld for the sole reason of preventing competition.
At Scott-Moncrieff, our Employment Law Solicitors can ensure that your business interests are properly protected through inclusion of restrictive covenants in employment contracts.
Relevant factors in determining the reasonableness of a covenant include:
- The geographical area to which the covenant applies. It may be reasonable, for example, to prevent a former employee from working with a competitor in the country in which your business operates, but not to restrict them from working with an employer in the same industry based overseas. However, worldwide restrictions can, in some cases, be reasonable.
- The length of time for which the employee is restricted. It is important to protect business know-how, particularly in innovative sectors. However, the duration of the covenant should not surpass the length of time it will take for the employee’s knowledge of your business to become out-of-date.
- The nature of the restrictions imposed by the covenant. Depending on the employee’s role in your company, it may be appropriate to include some forms of restrictive covenants, but not others. For example, if an employee is customer-facing but does not have access to confidential information, it may be reasonable to include a non-dealing covenant in his or her contract. A non-competition covenant may, however, be unreasonable – they would not be able to bring business knowledge to a competitor, and so business interests would not be protected by a non-competition clause. It is also generally possible to impose stricter covenants on more senior employees, who would be best placed to, for example, poach former colleagues.
- Standard practice in the relevant industry. A court may also consider whether the restrictive covenant falls in line with the expectations of a particular industry.
An experienced Employment Solicitor will be able to draw on their expertise to draft covenants in line with these considerations. We are also able to review existing contracts to ensure that the restrictive covenants are enforceable. Periodic review of all employment contracts is recommended to ensure that the contracts are up to date. Perception of what is reasonable may change over time.
Refusal to comply with a restrictive covenant
If a former employee has breached their restrictive covenant, we can advise on the best course of action. Generally, the employer should seek to obtain an injunction as soon as possible, which will require that the ex-employee ceases to act contrary to the covenant. A court may require, for example, that the ex-employee cuts off contact with your client, or destroys confidential information they have taken from your business.
If the breach has harmed your business, we can advise on the likelihood of success of a claim for damages. In some circumstances it may also be possible to sue the ex-employee’s new employer.
When drafting restrictive covenants, inclusion of a period of garden leave should be considered. A garden leave clause requires that the employee does not work at your business for all or part of their notice period. This restricts their access to clients and confidential information, and enables you to appoint their successor. As they are still your employee in name, they would not be permitted to work for a competitor during a period of garden leave.
A garden leave clause drafted in conjunction with a restrictive covenant can strengthen the protection of your commercial connections and know-how. These clauses are also subject to a reasonableness requirement – the period of leave cannot be longer than necessary to protect your business interests. Our expert Employment Lawyers are able to advise as to whether a garden leave clause could be usefully incorporated into your employment contracts, and, if this is felt to be beneficial, will ensure that the clauses will meet the reasonableness requirement.
Contact our Employment Solicitors London, Merseyside and Bath
Our specialist Employment Lawyers are experienced in drafting and reviewing all aspects of employment contracts, including restrictive covenants. We will ensure that the terms of your contracts protect your business and will withstand legal challenge. We are based in London, Merseyside and Bath and have advised clients in a range of industry sectors across England.
If you would like to discuss including restrictive covenants in employment contracts, or have any other questions, please get in touch via our online contact form or call our team now on 0203 131 4039.