Restrictive covenants in employment contracts
A well drafted and enforceable covenant will protect an employer’s confidential information, trade secrets, customer connections, sales, goodwill, and workforce.
We had a number of long standing employees and Gannons helped us to bring their restrictive covenants in line with their current roles.
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 would 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.
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 fort a competing business within a defined geographical area for a fixed 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 define mechanisms for:
- Protection: of the employer’s legitimate interests. For example trade connections, customers, prospective customers, their workforce;
- Extent: for how long and over which geographical areas.
- Senior or junior employee? – enforceability of restrictive covenants depends on the person’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.
Enforcing restrictive covenants
The starting point for taking legal action after a breach of a contractual post-termination restriction is whether it is enforceable or void. It can be void because it is a restraint of trade and contrary to public policy.
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.
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.
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 interim injunction: precluding the infringer from engaging in the restricted activity;
- Seek damages: from the employee for breach of the restrictions;
- Sue the new employer for inducing the employee to breach their contract.
- In any case, the infringer potentially faces significant legal costs. 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. Nor can legal costs be under-estimated.
Will the covenants be enforceable?
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 based on criteria which can include :
- Time – how long, if a time period was included in the covenant, was it for. Often more than a year will be very difficult to justify.
- Scope – usually refers to a geographical restriction such as not working for a competitor within a certain radius. The larger the area, the more difficult to justify.
- Seniority – generally, the more senior the employee, the better the argument for the employer that the covenant was legitimately needed.
- Industry – the courts will generally take into account industry or business sector considerations.
Sometimes the breach can only be stopped via litigation. The most common process is an injunction to prevent the employee from taking certain actions. Acting quickly is key
Another process is via the court to require undertakings to be given. 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 to refrain from breaching the restrictive covenant.
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.
- In equal measure 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.
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.
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