In this article I’ll be look at whether restrictive covenants in settlement agreements (formerly known as compromise agreements) may be upheld in a court of law if the former employer seeks to enforce those covenants. We’ll therefore take a look at:
- What is a restrictive covenant?
- Why might restrictive covenants be contained in a settlement agreement?
- Will a restrictive covenant in a settlement agreement be upheld if an employer seeks to enforce it?
What is a restrictive covenant?
A restrictive covenant – in a general context as well as specifically relating to employment law – is a promise not to undertake certain acts after your contract of employment terminates. This might, for example, be a promise not to compete with the former employer for a specified period after the employee leaves their employment or a promise not to “solicit” defined clients of the former employer.
Why might restrictive covenants be contained in a settlement agreement?
Restrictive covenants are normally relevant for senior employees or executives as they may have access to confidential information or trade secrets of their (former) employer, such as client lists or sensitive financial documents. Employers include such clauses in contracts of employment or settlement agreements to ensure that former employees do not unfairly compete with them after the termination of their employment.
The first thing that an employee should do if their employment with their employer is terminating is to check whether there are any restrictive covenants contained within their contract of employment. If so, then the covenants will apply unless the employer expressly agrees to waive those covenants in the settlement agreement. If not, then the employee has more scope to argue for the “watering-down” or removal of the restrictive covenants in their settlement agreement.
Will a restrictive covenant in a settlement agreement be upheld if an employer seeks to enforce it?
The fact that a restrictive covenant is in a settlement agreement (or compromise agreement) is likely to dispose the court towards enforcement of the restrictive covenant, even though the covenant will be examined by the court to determine whether the scope of the covenant is reasonable. There are a number of reasons why a restrictive covenant which is contained in a settlement agreement will dispose the court towards enforcement, including:
- Both parties in the settlement agreement will normally be legally represented (as a statutory settlement agreement is not valid if the employee does not receive legal advice from an independent adviser)
- The parties are able to better judge the reasonableness of a covenant at the termination of employment and are therefore in a potentially better position to negotiate the covenant
- The court may determine that the parties are no longer in an unequal bargaining position and the situation may be perceived to be more of a “commercial arm’s length transaction” (although in most settlement agreements the positions are still very much unequal!)
Employees who are currently in the process of negotiating a settlement agreement (whether or not they’re legally represented at the time of negotiation) should be extremely careful if there are res