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Restrictive covenants – a necessary evil?

Unpleasant as it is, one key area that needs to be carefully addressed prior to commencement of employment, are the contractual restraints that the employer wants to impose on the employee, should they leave at some future point.

Where I have seen things go horribly wrong on an exit, is where the employer has given little or no thought to how the nature of the employees role is linked to the restrictive covenants in the contract. Adopting a one size fits all approach to restrictive covenants, runs the risk of leaving your business exposed to an ex-employee targeting your customer base, key employees and encroaching upon your market.

Fill in your details to download our FREE guide setting out the types of restrictive covenants that you can include in the contract of employment.

What are restrictive covenants?

A restrictive covenant is a clause in a contract of employment which seeks to protect an employer’s business by restricting the activities of an employee after their employment has ended.

Why impose restrictive covenants?

Departing employees are often well-placed to take advantage of confidential information, strategic plans, customer and client details or other information about their employer’s business, after the termination of their employment. They may attempt to use this information for the benefit of their new employer, or in order to set up a rival business. There are certain implied terms that are automatically inserted into the contract which the employee must observe, such as the obligation of confidentiality, however these are of a limited nature and do not generally extend to the period after termination of the contract of employment.

Express restrictive covenants can serve two primary purposes. Firstly, they can extend beyond the period post termination of employment and if properly drafted and reasonable, can limit the employee’s conduct and prevent them from damaging the employer’s business. Secondly, they might deter competitors from breaching the restrictions, who fear the risk of the restrictions being enforced by the courts and being a party to a claim for inducing a breach of the restrictive covenants.

What thought process should an employer go through when reviewing existing or introducing restrictive covenants?

  1. Identify your legitimate business interest: you need to be able to show that there exists a legitimate business interest that the restrictive covenant seeks to protect. So for instance, connections with clients and customers (and in some cases, prospective clients and customers), trade connections with suppliers, confidential information and the stability of your workforce. If you can’t identify a legitimate interest then the restrictive covenant will be unenforceable.
  2. Be reasonable: a restrictive covenant which is wider than is reasonably necessary to protect the legitimate interests of the business is at risk of being unenforceable. Factors affecting reasonableness vary but may include scope, duration, geographical location, the nature of your business, the nature of the employee’s role and whether the restrictive covenant is usual in the sector.
  3. What type of restrictive covenant do you want?: The types of covenant that are appropriate will depend on the business interests that the employer is seeking to protect. For example, non-solicitation of customers and non-dealing with customers covenants may be sufficient to protect a business where the business interest that needs protection is customer contact lists.
  4. Who do you want to be bound by the restrictive covenant?: This is where you need to avoid adopting the one size fits all approach and introducing template restrictions. Although it can be tempting from an administration perspective, to apply the same covenants to the whole workforce, this can make it more difficult to enforce the restrictive covenant. For example, it may be necessary for an employer to protect its legitimate interests by imposing a non-solicitation covenant in respect of customers on managers of a certain level, because of the level of contact and influence that those managers have with customers. The same may not be true of team members working for a manager who have very little or no substantive contact with customers. If the same template restrictive covenants are rolled out throughout the workforce it may be difficult to justify the necessity of the restrictive covenant in relation to the individuals who pose the greatest threat to the employer and all the restrictive covenants are then at risk of being unenforceable.
  5. Length of the restrictive covenant: a shorter restrictive covenant benefits the worker, but a restrictive covenant with a long duration will be desired by an employer. For example, if the legitimate business interest to be protected is confidential information, then you should consider how long the information remains confidential before it becomes obsolete or enters the public domain. The longer the period, the greater the reasonableness of seeking a covenant with a longer period of restriction in order to protect the confidential information. Equally, if contact between a business and its clients is infrequent, or if clients are locked into contracts for a minimum period, this may justify a longer restricted period, because it is only at the end of the period that the business is likely to suffer damage as a result of solicitation.

As a matter of good practice, restrictive covenants should be reviewed and updated when an employee’s role changes or they are promoted. You should also use changes to the employment contracts as an opportunity to update the restrictive covenants.

At the start of a relationship, the last thing on your mind will be what could happen on termination, however, one of the most frequent queries raised by a prospective employee prior to commencing employment, is why the employer is imposing contractual restraints post termination of employment. By going through the thought process at 1-5 above, this will not only help you understand your reasons for including the restrictions in the contract, but also help you provide a clear message as to the business reasons why you need such protection and what the employee can and can’t do post termination of employment.

Fill in your details to download our FREE guide setting out the types of restrictive covenants that you can include in the contract of employment.