Restrictive Covenants

We find that both employers and employees find themselves wishing that they wished they had thought about restrictive covenants before the risk has arisen. Our specialist expertise in drafting, reviewing or enforcing restrictive covenants comes into play at all stages of the employment relationship.

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.

Based on questions we are often asked we have set out some of the basics surrounding restrictive covenants for consideration:

How to draft restrictive covenants in the employment agreement

Restrictive covenants 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.

Status

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.  There are different expectations placed on employees, consultants and shareholders as we explain.

Employees

The law recognises that the obligations employers place on employees depends on their seniority and job function.  Restrictions placed on senior employees or directors are more likely to be enforceable than the same restriction placed on a junior employee.

Shareholders

The law views a shareholder’s relationship with the company as strictly commercial. Hence the law assumes that shareholders understand their obligations when signing the shareholder’s agreement.  A shareholder’s agreement can contain more restrictive restrictions than the employment documentation.

Shareholder employees and 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 agreement 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.

Core activities to restrict

Typically, businesses use the following types of covenant, which all seek to prevent the ex-employee doing something.

Covenant Type Seeks to prevent
Confidentiality Using or disclosing, the ex-employer’s trade secrets, confidential information & IP
Non-compete Joining, or operating, a business competing with the ex-employer’s
Non-dealing Dealing with, or acting for, the ex-employer’s customers or suppliers
Non-solicitation/enticement Soliciting the ex-employer’s customers or suppliers
Non-poaching Poaching other members of the ex-employer’s workforce

Businesses often expand the scope of the restrictive covenant by including the following within the clauses:

Prospective customers

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” .

It is difficult to determine whether communication with a prospective customer amounted to ‘negotiations’. ‘Negotiations’ means more than an introductory meeting, more than a customer expressing interest in the employer’s services. ‘Negotiations’ means a contract is a real possibility, and both parties discuss the contract’s terms.

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.

Personal skill and restrictive covenants

Personal skill is difficult to restrict when an employee leaves.  An ex-employee is entitled to exploit their personal skill, training, qualifications and general knowledge for their or a future employers’ benefit. 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.

Typical events triggering the need for review

Corporate transaction can create problems.  Often the pre-sale restrictions are not appropriate for the post-sale business. The post-sale business is different, or employees have new roles.

Business growth is another problem area. For example, consider a media business. The business has probably moved into digital media, and perhaps expanded abroad. It no longer fears its competitors when it started, but faces a new set of competitors with different capabilities.

Updating restrictive covenants

Employers can change employment terms and modify restrictive covenants, if they take care and follow a process. Employees who unreasonably refuses to enter into a revised covenant risk a fair dismissal.  Employers could claim ‘some other substantial reason’ defence to unfair dismissal.

Employees who refuse 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 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.

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.

Are you being reasonable?

Reasonableness depends on when the restrictive covenant was signed, not when the employee leaves. Thus restrictive covenants should be regularly reviewed and updated, especially after promotions.

A settlement agreement can include fresh restrictive covenants when an employee leaves.

What can be done by employers faced with breach

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

  • Obtaining an interim injunctionprecluding the infringer from engaging in the restricted activity;
  • Seek damagesfrom 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.

We can review the facts and the evidence and tell you what choices you have.  We will assess the strength of the evidence and narrow down the avenues worth pursuing.

  • Gannons advice in relation to my restrictive covenants meant that I didn’t breach them by setting up my new business. Their advice was invaluable and I highly recommend Gannons.

  • We had a number of long standing employees and Gannons helped us to bring their restrictive covenants in line with their current roles.