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Restrictive Covenants

Expert guidance on restrictive covenants, which are clauses in contracts that limit an individual's actions after leaving employment. These clauses often restrict activities such as working for a competitor or soliciting clients or employees.

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What are restrictive covenants?
 

A restrictive covenant is a clause in an employment contract.  If it is present in the contract of employment the employee is prevented from specific activities when they leave employment.

 

Standard covenants are as follows:- 
 

  • non-competition covenants – an employee could not work for a competitor in similar role and use their knowledge of customers which is confidential information;

  • non-solicitation covenants – an employee would not be able to poach clients/customers/suppliers;

  • non-dealing covenants – an employee would not be able to deal with former clients/customers/suppliers, even if they approached the employee;

  • non-poaching covenants – an employee would not be able to take other colleagues with them  


The restrictions are prohibitive for a certain period after leaving employment.  
 

Although it is not quite as simple as an ex-employer placing restrictions on future employment, post-termination restrictions, are void where it is a restraint of trade, which goes against public policy. 

 

How can an employee be expected to move from employment into work that they are qualified or experienced in, if they are always restricted in what they can do? 

 

Well, an employer is generally not entitled to protect itself against competition from an ex-employee. Nevertheless, if a former employer can show to the Court that the covenant is designed to protect its legitimate business interests; and that it extends no further than reasonably necessary to protect those interests, the Court will be on the side of the ex-employer.

For a restrictive covenant to be enforced it must not be drafted too widely. This means that careful drafting of restrictive covenants is required to take into account the following:-

  • The breadth of the geographical area of any restriction;

  • The length of time of the post termination restriction must be justified. It is unlikely that a wide geographical area will be justified and, as a general rule, a restriction for more than 6-12 months will be difficult to justify. 

  • The breadth of the activities that the employer is trying to restrict.

  • The type of interest being protected – for instance, information such as trade secrets may be granted wider protection than customer information, given that its potential use across markets is wider.
     

An employer may also be required to evidence any connection between the employee and any information that is being protected.


The extent of clauses, therefore, must be relative to the employee's position within the business. If it is that a business operates a one-size fits all policy on restrictive covenant clauses they risk the clause becoming unenforceable. The Courts will consider standard practice in any particular industry, however, this does not guarantee that every employee's contract containing the same restrictive covenants will be found to be enforceable restrictions.  We are able to advise fully on the drafting and effects of any restrictive covenants which we would recommend must be under review regularly.

Restrictive Covenants are usually more relevant to senior employees because they may deal with more sensitive information, and therefore restrictions placed upon them may be justified as being more onerous.

Restrictive covenants may also require periodic review in order to maintain their enforceability as the reasonableness of the covenant is judged at the time it was entered into. 
 

Remedies for breach of restrictive covenants 
 

If an employer has reason to believe that an employee has breached the post-termination restriction, the most common remedy sought is an injunction.

An application will generally be made for an injunction and request that the employee "deliver up" or destroy confidential information. This means that the court will be asked to stop the employee in their tracks and will hear the full evidence at a later date in another trial. 

Where an employer claims a financial remedy or damages for breach of a restrictive covenant in an employment contract, the employer will need to show some loss resulting from the breach. This will normally be loss of profits on contracts or opportunities diverted by the employee. 

Where the employee has been induced by the employer's competitor into breaching restrictive covenants, the employer might choose to sue that new employer (particularly as the competitor company is likely to have greater financial resources from which to pay any award of damages made).   

 

We can advise and represent on these issues for both employer and employees, as to best course of action and for steps to be taken immediately without any delay resulting in financial losses for either party.

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