This post will look at restrictive covenants in employment agreements, in particular the following:
- What are restrictive covenants?
- When are restrictive covenants allowed?
- Why are they necessary?
- Who are subject to restrictive covenants?
- Examples of restrictive covenants
- What protection can they give to an employer?
- What remedy does an employer have if a restrictive covenant is breached?
- What’s the best method of restrictive covenant enforcement?
A restrictive covenant is a promise not to engage in conduct of a prescribed kind by an employee (or whatever capacity the person was in employed in) after they have left their employment. This post will focus on employees as the type of worker subject to the restrictive covenant but it is important to emphasize that other categories of persons (directors, consultants, partners, shareholders etc.) can be and often are subject to the same constraints. It will conclude that restrictive covenant enforcement is difficult unless the restrictive covenant in the employment agreement is reasonable and the actions of the employee are scrutinised.
Prior to the termination of employment employees are bound by certain implied terms in their contract of employment. These include the duties of mutual trust and confidence, the duty of fidelity, and the like. These implied ensure that the employer has some measure of protection against an employee acting against its best interests. However, the position changes once the employee leaves that employer. Unless there are express contractual terms limiting what the employee may do after the contract of employment is terminated then the employee is free to exercise their skills and knowledge in the manner that they see fit. It is therefore necessary to include post-termination restrictive covenants in the contract of employment to prevent the employee from taking advantage of potentially sensitive and valuable information that they may have had access to at their former employer. This includes, for example, databases of potential clients or relationships with particular clients that the former employee has developed through their employment. However, as stated above, restrictive covenants prevent the employee from exercising their skills and knowledge in the manner that they choose after they leave their employer. They are therefore in restraint of trade and prima facie void and unenforceable. Restrictive covenant enforcement can therefore often be difficult.
Post-termination restrictive covenants are enforceable if the employer can show that:
- It has a legitimate proprietary interest that requires protection; and
- The protection sought is no more than is reasonable, having regard to the parties’ and the public’s interests.
To be deemed reasonable a restrictive covenant must be limited itself. It must contain some limiting factor such as:
- Only a limited number of restricted activities (such as the restriction from solicitation)
- Only a limited geographical scope (for example, it would be extremely difficult to enforce a restrictive covenant which covered the whole of the United Kingdom)
- Only for a limited duration (if the restriction is for more than 12 months then it will be difficult to show that it is reasonable)
- Non-compete clause: stops employees from competing with their former employer post-termination for a certain duration of time and/or in a certain place
- Non-solicitation clause: generally included in employment agreements to stop employees from “soliciting” (potential) clients or employees of the former employer for a certain period of time (normally up to 12 months)
- Non-dealing clause: covers the total provision of services to customers of the former employer (i.e. the customer is prohibited from approaching you as opposed to the other way round)
- Garden leave clause: Forces employees to take an extended period of notice away from the office at the termination of their contract of employment
- Outside interests clause: restricts the employee’s freedom to undertake certain other activities during employment
As stated above, myriad categories of persons can and often are subject to restrictive covenants, including consultants, employees, directors, partners, owners and shareholders (among others). The exact nature of the restrictive covenant should be tailored to reflect the different necessary post-termination circumstances.
If the restrictive covenant is reasonable then it allows the employer to prevent the employee from engaging in certain activities. Failing this, the employer has a cause of action against the employee (breach of contract) and can obtain a suitable remedy against him.
By including it in the employee’s contractual documentation (either within the contract of employment or annexed to it).
- The employee can be compelled to account for profits gained as a result of the breach (in exceptional circumstances)
- Injunction (generally only if damages are not a sufficient remedy)
Redmans’ specialist employment lawyers are based in Richmond, London.