Employment restrictive covenants

It is increasingly common for employers to want to include employment contract clauses protecting the employer’s business, know how and IP when employees leave. Many employers are surprised to find out that having clauses in contracts still leaves significant risks.

What are employment restrictive covenants?

Restrictive covenants in the employment context are specific clauses included in the contract of employment or director service contract to protect the employer’s business interests when the employee leaves.

Regardless of how strongly such covenants are drafted in favour of the employer they are capable of being challenged legally by the employee. This is because the courts have determined that there is an unequal bargaining position between employers and employees.

Typical types of post-employment restriction include :

• Non-compete and not working for competitors
• Prohibition on poaching customers
• Prohibition on poaching staff
• Prohibition on using employer’s confidential information and know how

Why are restrictive covenants so important for employers?

In today’s data driven and highly competitive world, an ex-employee, particularly a fairly senior employee, could significantly damage an employer’s business after leaving due to his or her knowledge about customers and suppliers, business know how and who the key staff are at the previous employer and  which staff might be a valuable strategic hire for a competitor.

Consequently, employers will legitimately be concerned about protecting business critical knowhow and relationships with customers, clients and suppliers and to prevent key staff from being head hunted by competitors.

What kind of restrictive covenants are included in employment contracts?

Restrictive covenants may prevent ex-employees soliciting customers, clients, suppliers and other employees for a defined period after termination and also include non-compete provisions.

Post employment restrictions can also include a prohibition on the employee from working for a competitor for a set period of time and/or working for a competing business within a defined geographical area and/or for a fixed time period.

A well drafted and enforceable covenant will protect an employer’s confidential information, trade secrets, customer connections, sales, goodwill, and workforce. However, great care is needed when drafting to ensure any restrictions are proportionate and objectively justifiable.

Usually restrictive covenants will cover :

• Protection – of the employer’s legitimate interests. For example trade connections, customers, prospective customers, their workforce;
•  Extent – for how long will teh restriction apply and/or over which geographical areas.
• Senior or junior employee? – enforceability of restrictive covenants will often differ depending on the employee’s status in the organisation. Restrictions placed on senior employees or directors are more likely to be enforceable than the same restriction placed on a junior employee.

Breach of restrictive covenants

If an employee ignores the restrictions, which turn out to be enforceable, there are serious repercussions. To enforce the restrictions the business can:

• Apply for an injunction –  precluding the infringer from engaging in the restricted activity.
• Demand undertakings – Court agreed undertakings are more likely to be taken seriously than informal undertakings agreed between the parties. We often find that rather than face an injunction hearing the offending party will agree to undertakings not to continue breaching the restrictive covenant.
• Seek damages – from the employee for breach of the restrictions.
• Sue the new employer  – for inducing the employee to breach their contract. The new employer could offer the employee an indemnity against damages and costs. The indemnity might secure their employment. However, such an indemnity does not always happen.

Enforcing restrictive covenants

The starting point for taking legal action after a breach of a contractual post-termination restriction is whether it is enforceable, partly enforceable or void. It can be void because it is a restraint of trade and contrary to public policy. Much will depend on whether the covenant in question can be defended legally as reasonable and proportionate by the employer. The courts can decide that a particular covenant is fully enforceable, partially enforceable or unenforceable.

Employers must show the restrictions :-

• Have been breached – getting compelling evidence and proving that the source of any information obtained by a compeititor was from the ex-employee is not always easy. The evdience needed to obtain an injunction order must be very strong
• Protect legitimate business interests; and
• Extend no further than is necessary to protect those interests – factors to consider will include how long, if a time period was included in the covenant, was it for, the extent of any geographical restriction such as not working for a competitor within a certain radius, the seniority level of the employee and the type of Industry (the court will generally take into account industry or business sector norms and considerations).

As explained above, there are lots of factors a Court will consider relating to whether a restriction is enforceable, such as how long it lasts, geography, seniority of employee and potential restraint of trade. This is why good advice and good drafting of restrictive covenants is so important.

Why work with us?

We are specialist employment law solicitors up to-date with the latest law. The courts do update their views on enforcement of restrictive covenants and goal posts are changing.

• We draft and/or review restrictive covenants for employees who are thinking of taking a new job or thinking of moving on.
• We work with employers who want to make sure that the company assets are adequately protected. We draft restrictive covenants for new hires, amend exiting covenants to keep them up to-date and look at enforcement when the employee or director leaves.
• If facing or planning an injunction our litigation team can spring into action very quickly.

Recent work

Find out about some of our recent instructions in this specialist area and how we resolved matters for our client :-

• Enforcement of post employment restrictions
• Defending an employee facing an injunction for breach of restrictive covenants
• Examples of a range of restrictive covenant matters 

If you need advice on employment restrictive covenants, either and employer or employee, please do get in contact. Our employment lawyers are highly experienced and very practical.