A guide to restrictive covenants
During an employee’s time working for an employer they are likely to become privy to information, knowledge, contacts and assets that might be of benefit to their competitors.
Should that employee then leave the business and begin working elsewhere this may potentially damage the interests of that business.
However, there are some steps which an employer can take to reduce the potential risk to their business. In this article we will look at restrictive covenants and how businesses owners can use these to protect their business interests.
What is a restrictive covenant?
A restrictive covenant can be included in agreements and contracts to prevent an employee from competing against their former employer by taking or dealing with clients or customers of their former employer or by attempting to poach or “solicit” other employees for a period of time after they leave their employment. A restrictive covenant is sometimes known as a “non-compete” or “non-solicitation” clause for this reason.
One component of a restrictive covenant is the amount of time that the clause will apply, for example to restrict the former employee from offering a competing service. Another time period may work back from when the employee left and apply to those contacts the employee had during a certain time before they left.
Another component of a restrictive covenant is that it applies to a geographical area, such as a particular city, region or a distance from the employer’s place of business. It may also restrict the type of business that the non-competing party will be able to be involved in.
Enforcing a restrictive covenant
A restrictive covenant will only be enforceable if the amount of protection it offers to the employer is deemed as reasonable, necessary in order to protect legitimate business interests and if the scope in terms of the time and geographical area are reasonable.
Whether or not a restrictive covenant is reasonable is subject to many different factors including the nature of the employee’s role. For example, a restrictive covenant which bars an employee from working within the same industry nationwide might be unreasonable for a junior employee but might be reasonable for a senior employee in a company with a nationwide profile.
By the same token, it might be more reasonable and enforceable to prevent that employee from working in the same industry for 6 months than it would be to stop them from doing so for longer than 12 months. It would be unreasonable if the restrictive covenant attempted to prevent the employee from working altogether.
The employer would also have to prove that the reason for the restrictive covenant is for a legitimate business aim. For example, they may show that information that the employee had in respect of client contacts would prove valuable to their new employer and would cause damage to their own business.
As the process of proving that restrictions are reasonable can be difficult it is important to seek experienced legal advice to help draft you with drafting your restrictive covenants. As businesses grow and change with time, covenants might need to be updated and should therefore be reviewed regularly. They should also be tailored made around different employees to suit their job roles.
There are several different types of restrictive covenants which an employer might use to protect their interests, which we will now look at in detail.
A non-compete clause
A non-compete clause aims to prevent an employee from competing with a business after their employment period ends. As an employee often receives training, insights into procedures and workings of their company and other valuable information, they may be in a very strong position to be able to compete for business.
A non-compete clause helps to prevent the employee from competing with their former employers; this might be in the form of setting up their own business or by joining a particular competitor with which they might share valuable company information.
Non-compete clauses are among some of the most difficult restrictive covenants to enforce.
Non-poaching solicitation clause
An employee leaving a business may have identified which employees might also be willing to leave the business and work with them. A non-poaching clause prevents employees from poaching key co-workers and taking them with them to their new business. This type of clause also highlights the way in which restrictive covenants can act as deterrents; here an employee may be reluctant to poach a colleague to take with them to a new employer for fear of breaching this clause.
Employees often build professional relationships with their clients during their time at work through meeting them in person, speaking with them on the phone, or emailing them regularly. When an employee leaves their job they might try and use this relationship to their advantage. It is therefore sometimes necessary for an employer to put a non-solicitation clause into an employee’s contract so they know that when they leave (particularly if they are leaving to work with a competitor) they aren’t going to solicit these clients for work. A non-solicitation clause prevents an employee from approaching former clients to gain work.
A non-dealing clause works in a similar way to the non-solicitation clause in that it prevents an employee from working with a former client; however this type of covenant prevents them working together even if the employee was approached by the client as opposed to the other way round. This helps a business to retain its relationships with clients and suppliers.
Gardening leave is a contractual provision that is often used together with restrictive covenants to achieve similar aims. Gardening leave allows an employer to require an employee to serve their notice period at home, receiving the same salary and benefits but preventing them from working with a competitor. During this time they might be expected to handover any company laptops and phones in their possession and not to make contact with any clients.
As with restrictive covenants, the period of time which the employee is placed on gardening leave needs to be reasonable and the gardening leave clause must be contained in their contract.
Breaching a restrictive covenant
If an employee leaves and the employer suspects that employee may have breached a restrictive covenant then it is important to seek professional legal advice. This may result in arbitration, or the pursuance of an injunction against the former employee.
An employer might seek financial compensation, or may seek to prevent the employee from completing an action, such as joining another company. They might also seek to have the employee hand over any confidential information that might benefit their competition, for example a list of customer contact details.
Problems may arise when a restrictive covenant is poorly drafted and as such, unenforceable. This could be because the covenant is too restrictive, unfairly broad or goes beyond protecting a reasonable interest. Professional legal advice should be sought when drafting restrictive covenants into an employment contract to prevent this from happening.
Our employment law solicitors are experienced in drafting and reviewing restrictive covenants. If a dispute has arisen in respect of restrictive covenants, we can assist you in enforcing those terms through the court. We have significant expertise in pursuing restrictive covenant litigation and have successfully resolved cases involving a variety of industries.
To arrange a complimentary telephone consultation, please contact us online or call 020 7611 4848.