Restrictive covenants

It is increasingly common for employers to want to include clauses in employment contracts designed to protect the employer's business, know-how and intellectual property (IP) when employees leave. However, many employers are surprised to find that simply having restrictive covenants in place can still leave significant risks.

What are employment restrictive covenants?

Restrictive covenants in the employment context are specific clauses included an employment contract contract or director service contract which are intended to protect the employer's legitimate business interests when an employee or director leaves.

Regardless of how strongly such covenants are drafted in favour of the employer, they are capable of being challenged by the employee or director. This is because the courts generally recognise that they may be an imbalance in bargaining power between employers and employees, and post-termination restrictions can amount to a restraint of trade.

Our experience and services

We are specialist in employment law and keep up to-date with developments in the law. The courts continue to consider the circumstances in which restrictive covenants will be enforceable, and the legal position can develop over time.

• We work with employers who want to make sure that the company assets and legitimate business interests are adequately protected. We draft restrictive covenants for new hires, amend existing covenants to keep them up to-date and advise on enforcement when an employee or director leaves.
• We review restrictive covenants for employees who are thinking of taking a new job or leaving their current employment.
• If an employer is facing a potential breach or considering urgent injunctive relief, we can advise on the appropriate steps and work with specialist litigation support where required.

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 potentially damage an employer’s business after leaving due to their knowledge about customers and suppliers, business know-how, key employees and other confidential or commercially sensitive information.

Consequently, employers will legitimately be concerned about protecting business-critical know-how, confidential information and relationships with customers, clients and suppliers, as well as preventing key staff from being recruited by competitors.

What kind of restrictive covenants are included in employment contracts?

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

However, great care is needed when drafting restrictive covenants to ensure that any restrictions are proportionate and go no further than reasonably necessary to protect the employer's legitimate business interests.

Usually restrictive covenants will cover :

• Protection - the employer’s legitimate interests. For example trade connections, customers, prospective customers and their workforce;
• Extent - for how long the restriction will apply and, where relevant, the geographical area it will cover;
• Senior or junior employee? - enforceability of restrictive covenants will often differ depending on the employee's role and position within the organisation. Restrictions placed on senior employees or directors are generally more likely to be enforceable where they are properly drafted and justified, whereas the same restriction may be more difficult to justify for a junior employee.

Breach of restrictive covenants

If an employee ignores the restrictions, and the restrictions are enforceable, there are serious repercussions. To enforce the restrictions the business can:

• Apply for an injunction -  seeking an order preventing the employee from carrying out the restricted activity.
• Seek undertakings - an employee may agree to give formal undertakings not to continue breaching the restrictive covenant. We often find that, rather than face an injunction hearing, the offending party may agree to undertakings.
• Seek damages - the employer may seek damages from the employee for breach of the restrictions.
• Taking action against the new employer  - in appropriate circumstances, this may include a claim for inducing the employee to breach their contract. The new employer could offer the employee an indemnity against damages and costs. The indemnity might help the employee remain in their new employment, although 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 to establish whether the restriction is enforceable. 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 competitor was the ex-employee is not always easy. The evidence needed to obtain an injunction order can be extensive, particularly where urgent court intervention is sought;
• Protect legitimate business interests; and
• Extend no further than is reasonably necessary to protect those interests - factors to consider will include the duration of the restriction, any geographical restriction, the seniority and role of the employee, the nature of the business and the particular interest the employee is seeking to protect.

As explained above, there are lots of factors a court will consider when deciding whether a restriction is enforceable. This is why good advice and good drafting of restrictive covenants are so important.

Recent work

Find out about some of our recent instructions in this specialist area and how we helped resolve 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, whether you are an employer or employee, please do get in contact. Our employment lawyers are highly experienced and very practical.