I Wonder What Restrictive Covenants Are and How I Can Utilise Them?

Restrictive covenants are contractual provisions that allow employers to limit certain activities an employee may undertake after their employment ends. They can be an important tool for managing the risks associated with employees leaving to join competitors or establish competing businesses.

This article explores what restrictive covenants are and highlights the key factors that determine whether they are likely to be enforceable.

What Are Restrictive Covenants?

Restrictive covenants are clauses within an employment contract that place limits on what an employee can do after leaving a role for a defined period. They aim to protect the employer’s legitimate business interests, rather than to penalise the employee or restrict their career. In practice, from an employer’s perspective, restrictive covenants are designed to protect:

• Confidential information
• Client relationships
• Workforce stability

Common Types of Restrictive Covenants

Restrictive covenants can take several forms, each designed to protect different aspects of a business.

Non-Solicitation Clauses:
Non-solicitation clauses prevent a former employee from approaching clients, customers, or suppliers to move business away from the employer.

Non-Solicitation of Employees Clauses (Non-Poaching Clauses):
These clauses prevent a former employee from recruiting, or attempting to recruit, the employer’s staff.

Non-Employment Clauses:
Non-employment clauses restrain a former employee from employing, or facilitating the employment of, their former colleagues, even where there is no active solicitation.

Non-Compete Clauses:
Non-compete clauses prevent a former employee from joining a competitor or setting up a competing business. They are often used for senior or strategic roles in which employees have access to sensitive business information. These clauses have traditionally been harder to enforce than non-solicitation restrictions and, as such, are closely scrutinised by courts.

Non-Dealing Clauses:
Non-dealing clauses prevent a former employee from doing business with clients or customers, even if the client or customer approaches them voluntarily.

When and Why Employers Should Use Restrictive Covenants

Restrictive covenants can be an effective way for employers to protect their business interests, provided they are used proportionately. They are most relevant for senior employees who handle sensitive information, maintain key client relationships, or have significant influence over staff.

The advantages of including restrictive covenants in employment contracts include:

• Protecting confidential information and trade secrets
• Preserving client and supplier relationships
• Maintaining team stability and discouraging talent poaching
• Minimising the risk of unfair competition when an employee leaves

Enforceability Under UK Employment Law

Restrictive covenants can be valuable tools for employers, but their effectiveness depends on whether they are legally enforceable. Under UK law, such clauses are not lightly upheld. This reflects the broader principle that we operate in a free-market economy, where competition is encouraged, and restraints on trade are generally prohibited.

Under UK law, any contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to public policy, unless the employer can show that:

• It has a legitimate business interest that it is appropriate to protect.
• The protection sought is no more than is reasonable, having regard to the interests of the parties and the public interest.

Examples of legitimate business interests include:

• Protecting confidential information or trade secrets
• Safeguarding trade connections, such as client relationships
• Ensuring stability of the workforce

However, even where a legitimate interest is identified, the employer must also show that the covenant itself is reasonable. Courts assess reasonableness by considering three main factors:

• Duration: How long the restriction will affect the employee’s activities
• Geographical scope: The area within which the employee is restricted
• Scope of activities: The specific duties or activities that are limited

Each covenant should be carefully tailored to the individual employee’s role and level of responsibility, as overly broad clauses are often unenforceable. By carefully addressing the factors outlined above when drafting and implementing restrictive covenants, employers can improve the likelihood that the clauses will be upheld if challenged, thereby offering meaningful protection for the business.

Practical Tips for Employers

To maximise effectiveness while minimising legal risk, employers can:

• Tailor covenants to the role – The clause should not be generic; instead, it should align with the employee’s specific responsibilities, level of access, and influence within the business to ensure it is reasonable.
   
• Keep restrictions reasonable – Ensure duration, geographical scope, and scope of activity are proportionate to the legitimate business interest.
   
• Use clear wording – Vague or ambiguous clauses are more likely to be unenforceable.
   
• Update contracts when roles change – Review covenants when employees are promoted, given additional responsibilities, or move to positions with greater access to sensitive information. This will ensure the covenants continue to reflect the employee’s role and responsibilities, maintaining their relevance and enforceability.

Summary

In conclusion, when used correctly, restrictive covenants can provide meaningful protection for a business. However, their effectiveness depends on careful drafting, the identification of a legitimate business interest to be protected, and the overall reasonableness of the clause.

Further Advice

If you have any queries on restrictive covenants or any other employment-related matters, our Peace of Mind Team is here to provide expert guidance. Our Document Audit Team can also assist in drafting restrictive covenant clauses and other relevant clauses or workplace policies.

Contact our Employment Team by emailing employment@warnergoodman.co.uk or calling 023 8071 7717.

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