Are the restrictive covenants in your employment contracts reasonable?

Every business with a bright future will strive to protect their competitive edge.  When an employee departs they could seek to exploit commercially sensitive information, tap up former clients for business or encourage colleagues to follow them to a new position. 

Restrictive covenants can be utilised in employment contracts; however it is vital that any employer looking to protect their business by these measures ensure such restrictions are reasonable in order for them to be enforceable through the Courts.  Howard Robson, Partner in our Employment Law team, reviews a recent tribunal case where an employer was able to do exactly that and was successful in the implementation of the restrictions.

What are restrictive covenants?

When an employee leaves and there is a potential threat of valuable business information being passed to a competitor, or personal trade connections being exploited, valid and enforceable restrictive covenants in the contract of employment are a very effective measure in protecting that data and those valuable relationships which may have taken years to build. 

There are various types of restrictive covenant available to an employer, including:

• Non-competition - restricting the former employee from working for a competitor, or setting up a competing business.
• Non-solicitation – restricting the former employee from approaching clients and prospective clients once they have moved to a new business or set up their own business.
• Non-dealing – restricting any contact between the former employee, clients and prospective clients, even if it is not the employee initiating that contact.
• Non-poaching – restricts the former employee from approaching their previous colleagues to move to their new employer or their own business. 
• Garden leave – to be used once an employee has given notice to prevent them from attending the office and can prevent them from working during their notice period.   

Restrictive covenants that include as much detail as possible as to the restricted time periods that apply, the type of work being restricted and other requirements, for example particular customers may be identified as ‘off limits’ during a period of restriction, will work in favour of the employer should they ever be challenged or disputed.

The case of Square Global Limited v. Leonard has shown that while the Court will enforce non-competition clauses, restrictions must go no further than protecting ‘legitimate business interests’.  It also highlighted the importance of being clear about any ‘garden leave’ clauses where employees are permitted to work out their notice period at home.  

In this specific case, a broker was contracted to give six-months’ notice, together with a restriction on working for a competitor for six months after the end of his employment.  When he handed in his notice, with immediate effect, and left to work for a competitor, his former employer relied on the employment contract to prevent him from doing so.  In response, the broker claimed he had been ‘constructively dismissed’ (in that his employer had done something entitling him to consider he had been dismissed by them), arguing this released him from his obligation to give notice and from the non-compete clause.

The High Court upheld the employer’s argument, stating that the six-month non-compete clause was reasonable and went no further than necessary to protect the employer’s legitimate business interests.  The Court also ruled that the broker was required to serve out his six-month notice period, on top of the six-month restriction, keeping him out of the market for a total of 12 months. 

This compares with a case in 2014, Ashcourt Rowan Financial Planning Limited v Hall, where the High Court held that a restrictive covenant designed to prevent a former employee from working for a competitor for six months was unenforceable because the covenant was too widely drawn, going beyond protecting the legitimate business interests of the employer to be in restraint of trade. 

The law has long regarded any covenant 'in restraint of trade' as being void, because it is potentially anti-competitive in its effect and hence against public policy. They are only enforceable if the effect is strictly limited to what is necessary to protect certain business information and relationships.

How can I ensure the restrictive covenants are reasonable?

When considering restrictive covenants in your employment contracts, the devil is in the detail, and you must exercise due care and attention to whether they achieve a legitimate business interest.  It is essential you receive good legal advice when drafting restrictive covenants as the law is complex and enforceability will be dependent on the actions of your own business, the market sector and structure.

Generally the following factors will be considered by the Court:

• How restrictive the covenants are – a tribunal will examine the length, geographic coverage and areas of business within a covenant to ascertain whether they truly protect the business or whether they are intentionally preventing the employee from earning a living by being too wide in their impact.   
• Legitimate interests of the business – the burden of proof will lie with you as the employer to show why the breach of any clause in the employment contract would have a detrimental impact on the future of your business. 
• Job role – consideration of the seniority and department of the employee will determine the reasonableness; some senior roles or those in a sales capacity, for example, will naturally have more access to client data.  Any change in a job role should also include a review of any covenants already included within an employment contract to ensure appropriateness.

This case is a reminder that employers need to ensure that non–competition clauses and other restrictive covenants are reasonable and focus on activities which would involve the employee directly competing with their old employer and particularly in exploiting confidential information, existing business connections and networks. 

As discussed above, receiving appropriate legal advice will assist in taking appropriate steps to ensure the covenants are tailored to the business circumstances and enforceability the key objective.

If you are an employer seeking advice on the restrictive covenants within your employment contracts, you can contact Howard or a member of the Employment Law team on 023 8071 7717 or email employment@warnergoodman.co.uk.

To receive regular Employment Law updates from the team regarding recent tribunal cases and legislation updates, you can subscribe to our weekly Employment Law Newsletter by completing our subscription form or emailing us at events@warnergoodman.co.uk. 

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.