Restrictive covenants in employment contracts
We find that both employers and employees find themselves wishing they had thought about restrictive covenants before the risk has arisen.
Please do call us if you have a concern. We are happy to scope work and provide estimates.
Why pick 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 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.
What are typical post-employment restrictions?
Restrictive covenants may prevent ex-employees soliciting customers, clients, suppliers and other employees for a defined period after termination. A well drafted and enforceable covenant will protect an employer’s confidential information, trade secrets, customer connections, sales, goodwill, and workforce.
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?
The first job is to identify who is the intended person being restricted. The 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.
Shareholder employee restrictive covenants
Shareholders who are also employees or directors create additional complications. The benefit to including restrictive covenants in the shareholders agreement is, for an employee or director, the value of shares may well be greater than the work of the employment contract. Therefore restrictions attaching to shares may be more of a deterrent.
Often we include shorter restrictions in the employment contract and more comprehensive restrictive covenants in the shareholders agreement.
Consultants and restrictive covenants
The employment law protections which benefit employees and directors do not apply to consultants. Thus companies gain a wider range of possibilities in imposing restrictive covenants.
Businesses often expand the scope of the restrictive covenant by including the following within the clauses:
Employers can enforce clauses preventing ex-employees dealing with their actual customers. What’s trickier is a clause preventing the ex-employee dealing with companies with whom the employer has only had previous “negotiations” .
Confidential information and trade secrets
Employers wish to prevent former employees exploiting confidential business information and trade secrets. However, the business must identify what information is protected by restrictive covenants, and what isn’t.
However, specific items of information may indisputably belong to the ex-employer, for example:
- Customer lists;
- Business plans;
- Delivery routes;
- Price lists;
- Costings; and
- Supplier details.
Keeping restrictive covenants up-to-date
Employers should update restrictive covenants whenever an employee, director or consultant changes role. Usually that person gains access to new know how covering suppliers, customers or know-how.
What if an employee refuses to enter into restrictive covenants?
We do help employers who have employees refusing to sign up to the proposed restrictive covenants. Refusal to sign can be grounds for a fair dismissal. A fair dismissal should not give rise to a successful claim for compensation from the employer for unfair dismissal.
Factors to take into account
Employment Tribunals usually consider if the:
- Refusal to sign the contract with the restrictive covenant justifies dismissal;
- Employer had a genuine belief that dismissal for that reason was justified;
- Threat to the business was justified. Directors are more likely to be a threat than a junior employee,
- Necessity to dismiss was fair.
Enforcing restrictive covenants
The starting point for any 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:
- 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.
Restrictive covenants and PILONs
Employers who breach the employment contract may be prevented from relying on the post termination restrictive covenants.
Including a payment in lieu of notice clause in the employment contract will allow the employer to terminate the contract immediately by making a payment in lieu of notice. The express clause avoids a breach of contract by the employer due to the immediate termination and payment. The post termination restrictive covenants remain enforceable.
A settlement agreement can include fresh restrictive covenants when an employee leaves.
Breach of restrictive covenant
If an employee ignores the restrictions, which turn out to be enforceable, there are serious repercussions. To enforce the restrictions the business can:
- Obtaining 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.
Injunctions and undertakings
Sometimes the breach can only be stopped via litigation. The most common process is an injunction to prevent the employee from taking certain actions. 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.