In this article Chris Hadrill, the partner in the employment team at Redmans, gives his guidance to employees on what restrictive covenants are and why employers try to include them in settlement agreements
- What are restrictive covenants?
- What effect could a restrictive covenant have on me?
- Why do employers put restrictive covenants in settlement agreements?
- What should I do if my employer has put restrictive covenants in a settlement agreement?
What are restrictive covenants?
Restrictive covenants are clauses in a contract which (in an employment context) seek to restrain an employee from undertaking particular actions either during their employment or after their employment has terminated. There are a variety of types of restrictive covenant, including (but not limited to):
- Non-compete covenant (read our article on non-compete covenants here) – these covenants generally try to restrain an employee from joining a competitor of the employer’s for a certain period of time once the employee’s employment terminates;
- Non-solicitation covenant – these covenants generally try and restrain an employee from ‘poaching’ clients/customers, employees, and suppliers away from the employer for a certain period of time once the employee’s employment terminates;
- Non-dealing covenant – these covenants work to stop a client/customer, colleague or supplier from contacting the employee for a period of time once their employment terminates;
- Non-interference covenant – these covenants generally try and restrain an employee from interfering in the relationship that the employer has with a third party (for example, a supplier) for a period of time once their employment terminates
The above list is not exhaustive but represents the most common types of restrictive covenant that an employer uses in a contract of employment and/or a settlement agreement.
Case study: Sunrise Brokers LLP v Rodgers – High Court enforces restrictive covenants against broker
In this case the High Court enforced restrictive covenants against a broker who had left his employment in breach of the covenants
What effect could a restrictive covenant have on me?
If you have been provided with a settlement agreement then you should carefully check the settlement agreement to determine whether there are any restrictive covenants referred to within the agreement – these restrictive covenants could be within the body of the settlement agreement (or a schedule to it) or in your contract of employment; they could also be contained within a free-standing ‘confidentiality agreement’ (or similar type of agreement), a shareholder agreement or partnership agreement, or in a staff handbook (this is, please note, not an exhaustive list).
Make sure that you (and your solicitor) are as thorough as possible when checking the settlement agreement and other contractual documents that you are bound by – a failure to spot a restrictive covenant could lead to you being bound by that covenant once you have signed the settlement agreement (whereas if it had been spotted during the review process then it may have been possible to negotiate that you be released from a restrictive covenant).
Why do employers put restrictive covenants in settlement agreements?
The core objective of a post-termination restrictive covenant is to protect an employee from unfair competition from a former employee, by restraining that employee from joining a business, preventing them from undertaking certain actions (such as poaching clients, for example), and/or restraining them from using the employer’s confidential information.
In practice, however, employers often misuse post-termination restrictive covenants – these covenants are enforceable only so long as they are reasonable, and whether a covenant is reasonable in a particular circumstance will depend upon the variables. For example, it will not normally be fair and reasonable to bind a receptionist at an organisation to any form of post-employment non-compete covenant: what protection does such a covenant give the employer, given that the receptionist is highly unlikely to have had access to the sort of sensitive information which would mean that they could unfairly compete against their former employer.
What should I do if my employer has put restrictive covenants in a settlement agreement?
If you are bound by a restrictive covenant – whether in your settlement agreement or otherwise – then you should do the following (please note that this list is not exhaustive, but is simply meant to outline the basic steps that you should undertake):
- Carefully put together all the contractual documents that you are bound by;
- If you wish to be released from any restrictive covenants that you are bound by then try and persuade your employer to agree to release you from them (or to water them down);
- Take expert legal advice from an employment lawyer on the restrictive covenants