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Restrictive covenants: treading the tightrope between protection and exposure
- AuthorEmily Kearsey
Post-termination restrictive covenants are commonplace in employment contracts of senior personnel, operating as a line of defence to protect the company from harm should that employee leave to work elsewhere. However such restrictions fly in the face of public policy, which favours an individual’s freedom to be employed by, trade, and deal with whoever they choose. For this reason, the law strictly limits the use of restrictive covenants and courts are willing to strike them down in their entirety if they are overly restrictive. As such, unless drafted carefully, restrictive covenants may well not be worth the paper they are written on.
In this article, we explain the basic principles governing the use of restrictive covenants and set out some practical steps for your business to follow to try and ensure that it is protected, not exposed.
What is a post-termination restrictive covenant?
In an employment context this is typically a clause in an employee’s contract which restricts their activities after their employment ends, for example not working for or being involved in a competing business or soliciting clients.
For a restrictive covenant to be enforceable your business must have a legitimate interest it is seeking to protect and the covenant must be no wider than is necessary to protect that legitimate interest.
The following are ‘legitimate interests’ which can justify protection:
your trade connections, e.g. relationships with customers, clients, and suppliers (typically protected by non-dealing covenants or non-solicitation covenants).
the stability of your workforce (typically protected by non-poaching covenants).
your trade secrets and other confidential information e.g. pricing models, design plans etc. (typically protected by non-compete covenants).
‘No wider than is necessary’
Another way of explaining this is ‘don’t be greedy’. Any covenant needs to be carefully drafted so that the restrictive effect on the employee is proportionate to what you are trying to protect. If a court finds that a less onerous restriction would have provided adequate protection then the covenant will be unenforceable.
For example, imagine you are trying to protect your business’ relationship with key clients by imposing a 12 month non-dealing restriction on senior sales personnel. If your covenant is challenged and a court finds that your client connections would have been adequately protected by a 12 month non-solicitation restriction (which is narrower than a non-deal restriction) or by a shorter 6 month non-dealing restriction, then the original covenant will be unenforceable, leaving your business exposed.
To work out what is ‘adequate’ protection a court would take into account a variety of factors including: the covenant’s duration, its geographical scope, the employee’s status and position at the time the restriction was entered into, the nature of the market and the business itself etc. Broadly speaking non compete restrictions are the hardest to justify being the most onerous.
Dos and don’ts
- Ask yourself what interest are you trying to protect i.e. does the employee have knowledge of confidential information, do they have client/customer contact, do they have influence over other employees or operate in a team where they could instigate a team move? This will help you determine what sort of covenants are appropriate.
- Consider how you would justify the covenant if required e.g. what is the rationale for its nature, its duration, and its geographical scope. Could a less onerous covenant provide adequate protection for your business?
- Seek legal advice when drafting covenants. Case law in this area evolves at a fast rate and simple drafting omissions can invalidate your covenants.
- Don’t adopt a one-size-fits-all approach by imposing the same covenants regardless of seniority, job role etc. This is easily done when adapting template employment contracts in a rush. Remember that to stand a chance of being enforceable the restrictions must be carefully tailored to the individual employee and be justifiable.
- Don’t breach the employee’s employment contract and then seek to rely on your restrictive covenants. This can be easily done. For example, if you pay an employee in lieu of notice but have no contractual ability to do so, then technically this is a breach of contract and will cause the restrictive covenants to fall away.
- Don’t forget to review the applicability of existing covenants when an employee is about to be promoted or to change roles. Consider whether it is appropriate ask them to agree to new covenants or to amend existing ones.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.