What are the main restrictive covenants?
Restrictive covenants are contractual terms in employment contracts that are used to prevent a former employee from engaging in certain activities following the end of an employment relationship. The aim of restrictive covenants is to protect their business against competitive threats and protect legitimate business interests.
In summary, the main types of restrictive covenants are:
- Non-compete covenant: To prevent the former employee from engaging in competitive activities for a certain period of time after they have left the business.
- Non-solicitation of customers covenant: To prevent the former employee from seeking business from specified clients or customers.
- Non-solicitation of employees covenant: To prevent the former employee from employing or engaging with former colleagues or assisting others (such as a new employer) from doing so.
Why do employers use restrictive covenants?
Building strong customer relationships, goodwill and confidential planning strategies takes time. Therefore, employers will want to protect their business from losing these assets. Naturally, no one is expected to work for the same organisation forever, it is therefore important that employees know what they can and can’t do during their and after their employment.
During an employment relationship, employees are bound by express and implied duties towards their employer. Express duties can be found in employment contracts and company policies which explicitly set out what is expected from an employee. Implied duties are those that are unwritten but implied through the nature of the employee and employer relationship, including a duty of mutual trust and confidence, confidentiality and not to compete during employment.
After the employment relationship has ended, employees will still owe a duty to protect confidential information but this will only provide limited protection. Restrictive covenants are used to lower the risk of employees taking valuable know-how and using it for the benefit of other competitors. It is therefore important that, where former employees have access to valuable knowledge, restrictive covenants are carefully drafted to protect legitimate business interests.
Are restrictive covenants always enforceable?
For a restrictive covenant to be enforced it must not be drafted too widely. The burden falls on the employer to demonstrate that the clause is reasonably justified. This includes taking into account the nature of the employee’s role, and whether the restriction is necessary to protect legitimate business interests. If it does not meet these requirements, it can be unenforceable.
What is a legitimate business interest?
Business interests depend on the specific business, but the courts have typically stated that employers have legitimate business interests in protecting confidential information or trade secrets, maintaining customer relationships and maintaining a stable workforce.
What is considered as reasonable?
Whether a restrictive covenant is reasonable will depend on the nature of the employer’s business and the employee’s role. For example, a 12-month non-compete covenant is less likely to be enforceable against a junior employee with little access to any confidential information, whereas it may be held to be more reasonable against a company director.
Employers should also consider if there are any alternatives to restricting the employee that would achieve the same legitimate business interest.
What happens if an employee breaches a restrictive covenant?
Where an employer has reasonable belief that the former employee has breached a restrictive covenant, the most common remedy sought is an injunction. Injunctions are a court order which will immediately stop a former employee from working for a competitor, using confidential information, and soliciting clients and employees. Bringing an injunction can be complex and costly for the employer.
A court may also require the former employee to “deliver up” or destroy all confidential information they have access too. Where an employer claims a financial remedy, they will need to show evidence of loss occurring from the breach of the restrictive covenant, for example, loss of profit.
Key takeaway
Restrictions should not be open ended. It is important to carefully draft restrictive covenants on an individual employee basis because a general one size fits all policy will increase the risk of unenforceability. Therefore, it is important to ensure that clauses are bespoke and are assessed carefully to ensure that these go no further than is required to protect the business.
Reach out to the People2.0 legal Team to discuss restrictive covenants during your next onboarding.
