Business Law

Restrictive Covenants - A Guide for Employers

Any business wants to protect itself from competition and one way is to include restrictive covenants in Employment Contracts.  These restrictions are intended to continue after an employee has left his job, and to prevent him taking business from his former employer. 

Because restrictive covenants are intended to protect the business of the employer, they should only appear in the contracts of those employees which may be a threat to the business if they go and work for a competitor or set up a competition.  A manager, senior sales person or director who has had contact with and built relationships with clients of the business, may damage the business if they leave and are not subject to restrictive covenants.  However, restrictive covenants will only be enforced by the Courts as long as they only go as far as is reasonably necessary to protect the employer’s business interests. 

Restrictive covenants fall into five main categories:

1. Not to set up in business and compete. 
2. Not to go and work for a competing business. 
3. Not to “poach” customers/clients of the business. 
4. Not to “poach” existing employees of the business.
5. Confidentiality.

A restrictive covenant is only going to be enforceable as far as it is reasonable to protect the legitimate interests of a business.  This is because there is a conflict between a business legitimately wishing to protect itself from competition and an individual’s right to continue with his or her trade or profession.  To address this conflict the Courts have imposed certain limits on the enforceability of restrictive covenants. 

Restrictive covenants need to be limited in time (e.g. applying for 3 months, 6 months etc.) and/or geographically.  There is no point including a 24 month restrictive covenant in a contract for a junior sales manager as the business is unlikely to be able to justify that as reasonable to protect its interests when weighed against a right to work.  As a rule of thumb, 3-6 months would probably be enforceable; 6-12 months may be enforceable; 12-24 months are only likely to be enforceable against very senior employees and restrictions lasting longer than 24 months are unlikely to be enforceable. 

The enforceability of a geographical restriction will depend on various factors such as the nature of the business, the whereabouts of the client base and the locality of the business.  This is not an exhaustive list of considerations. 

If your senior staff are very important to you and you are concerned that a leaving employee may attempt to entice them away upon leaving, you may consider including a restrictive covenant preventing the “poaching” of the staff.  Again, this restriction should only apply to the poaching of senior employees, or those with specific skills, and not to all employees as that may make the restriction unenforceable. 

It is also useful to include a provision that a former employee must notify a new employer of the restrictions he is subject to.  A failure to do so would then be a breach of contract and lay the new employer open to legal action from the former employer.  If the new employer instructs an employee to do something which is in breach of a restrictive covenant, the new employer could be found to be inducing a breach of contract and liable to pay damages. 

A duty to keep your employer’s confidential information confidential is implied into all employment contracts.  This obligation continues after the termination of the contract.  However, after the end of employment this is limited to trade secrets and may not be extensive enough for your business needs.  Many contracts have an express term imposing a more extensive duty of confidentiality applying both during the employment and after its termination.  Restrictive covenants can be enforced against a former employee by a claim for damages of breach of the covenant which would be assessed by valuing the loss suffered by business caused by the breach.  Alternatively, if urgent action is required to stop an employee breaching their covenants then an employer can apply to the Court to obtain an injunction to prevent the breach.  This can be followed by a damages claim.  This is a complicated and expensive area of law and therefore it is important to have covenants which are justifiable and therefore enforceable and to act quickly if you think your employee is about to breach his or her restrictive covenants. 

If you are about to offer employment to a new employee and would like to include restrictive covenants, we would be happy to advise you and draft appropriate covenant clauses.  You may be about to employ someone who is subject to restrictions from their previous employment and need advice.  Alternatively, you may have an employee who is already subject to restrictive covenants and you fear he or she may be about to breach them upon leaving.  If you are at all concerned about the enforceability of your restrictive covenants then, again, we are happy to advise you.

For further information please contact:

Marina Vincent on 020 8422 5678