March’s Employment Law Digest: Restrictive Covenants – A Key Tool for Protecting Your Business
20th March, 2023
In the midst of an unstable economic climate, with news of a potential recession and "The Great Resignation" dominating headlines, it is now more important than ever for businesses to consider how to best protect themselves.
Whether an employee has resigned in search of better pay or work/life balance or is made redundant as a result of business restructures, a key focus will be ensuring that the business’ assets, workforce and client contacts are protected. Cue restrictive covenants….
What are restrictive covenants?
Essentially, restrictive covenants are clauses which (as the name suggests) restrict the actions which an employee can take when they leave their employment.
There are various types of restrictive covenants. The most common covenants include:
- Non-solicitation covenants – these prevent an ex-employee from contacting a customer or client of the former employer with a view to obtaining their business
- Non-poaching covenants – which prevent a former employee from soliciting other employees from the business
- Non-compete covenants – these prevent an employee from joining a competing business for a defined period of time after termination of employment
When should restrictive covenants be used?
You should consider introducing restrictive covenants for individuals who undertake senior or key roles within your business, or for individuals who are well-placed to take advantage of your confidential information, customer or client details by nature of their job role. The key question for employers to ask themselves is: is there a risk to the business if the particular individual leaves.
Most commonly, restrictive covenants are included in the employment contract at the start of employment. However, they can also be introduced during the course of employment, for example if the individual is promoted into a more senior role.
So restrictive covenants are not something which are just to be considered at the outset of employment, the key is to regularly review your restrictive covenants to ensure they remain fit for purpose.
Rules for restrictive covenants
The general rule is that restrictive covenants will be deemed unenforceable unless the employer can show that:
- It has a legitimate interest that it is appropriate to protect
- For example the employer’s confidential information, trade connections with customers, clients or suppliers or maintaining the stability of its workforce.
- The sole aim of preventing competition will never be sufficient, so think deeper about what it really is that the business is trying to protect.
- The protection sought is no more than is reasonable having regard to the interests of the employer, employee and the public interest.
- This is assessed at the time the covenant is entered into, so don’t impose a really onerous restriction on the assumption that the employee will be promoted in the future, the restriction must correspond to the level of risk which exists at the time the covenant is entered into.
The easiest way to enter into restrictive covenants is to include them in an employment contract which is signed at the outset of employment.
However, this isn’t always possible. In some cases, restrictive covenants may not be necessary until an employee is promoted into a more senior role, in which case you should take advice before entering into any covenants as you will want to ensure they are executed correctly and that sufficient consideration is given to the covenants to ensure they are enforceable.
Top tips when drafting restrictive covenants
Restrictive covenants are not the most straightforward clauses to enter into and there are plenty of potential pitfalls.
It’s crucial that these covenants are drafted correctly as this will make the difference as to whether or not they are enforceable, and therefore whether or not they are ultimately successful in protecting your business.
Our top tips when drafting restrictive covenants are as follows:
One size does not fit all
Avoid ‘standard’ restrictive covenants which are included in all employment contracts as a matter of course. If you want the restrictive covenant to be enforceable (which is obviously the end goal) you must tailor the covenant for each employee and be able to demonstrate why that particular covenant is necessary for that individual employee.
E.g. a restrictive covenant preventing non-solicitation may be appropriate for a Business Development Lead or a Sales Director but may not necessarily be required for an IT Director who manages the business’ IT operations.
Less is more…
Whilst it can be tempting to cast the net as wide as possible in terms of any geographical restrictions or the duration of any covenants, remember the covenant must be ‘no more than is reasonable’. Employers should consider: what is the least restrictive way to protect the business, whilst taking into account how long is feasibly required to secure relationships in key areas of risk. If the covenant is found to be overly onerous, the courts will not agree to reduce the geographical scope or the duration of the restriction, they will simply declare it unenforceable.
Restrictive covenants are all about balance
When drafting restrictive covenants, keep in mind what legitimate interest you are trying to protect and what effect the proposed restriction will have on the employee. If the balance tips too far in your favour, the restriction will be going further than is necessary and is likely to be deemed to be unenforceable.
In contrast, if an employee is promoted into a more senior or client-facing role, the restrictive covenants entered into at the outset of employment may no longer be sufficient, in which case you would need to review those covenants and seek to amend the covenants appropriately.
The Government launched a consultation in December 2020 seeking views on the following proposals:
- Making non-compete clauses in contracts of employment enforceable only where the employer provides compensation during the non-compete period.
- Alternatively, banning non-compete clauses altogether within employment contracts.
Despite the consultation ending on 26 February 2021, there has been no substantive update since then, so it’s a case of watch this space.
However, for the moment at least, restrictive covenants continue to be a key tool to protecting your business interests upon an employee’s exit and we are seeing more and more businesses prepared to take action to enforce restrictions. If you want to be able to rely on this protection in future then making sure restrictions are properly drafted is going to be crucial.
If you have any queries about restrictive covenants or for more information, please get in touch with one of our expert Employment Lawyers.