Restrictive covenants for employers

You may wish to use restrictive covenants in your employment contracts to prevent an ex-employee unreasonably exploiting business contacts and confidential information.  

Such covenants may restrict working for or establishing a competing business, or soliciting and dealing with clients, as well as poaching former colleagues.  

Restrictive covenants are usually negotiated at the start of the employment, however they only take effect when the employment has come to an end when they prevent the former employee from competing in some way.  The critical time to consider whether the covenants are reasonable is at the time that they are agreed and not when they are being enforced.  It is therefore important that having drafted them you keep them under review and if an employee is promoted into a position where they have greater potential to cause damage to your business then you may need to consider changing the wording of the covenants.

If covenants are introduced at the start of employment then you can do so without paying any specific price for their inclusion in the contract.  If you want to introduce covenants at a later stage when an employee is promoted to a new role or when a particular risk occurs then you will need to pay a price for the introduction of the covenants.

The courts will not redraft clauses that they consider to be unreasonable so it is important to keep clauses under review.

In order for restrictive covenants in employment contracts to be enforceable, they must go only as far as is necessary to protect the legitimate business interests of the employer.  Here, we explain the appropriate actions that must be taken to meet this requirement, and the steps to take should an ex-employee breach their covenants:

What are the different types of restrictive covenant?

There are several types of restrictive covenant that can be included in employment contracts:

Non-compete

This restricts an ex-employee from working for a competitor, or setting up a competing business, and will be more pertinent if they had access to confidential know-how or pricing structures.  The ex-employee would be prevented from taking this confidential or valuable information to a competing business.  These clauses should be time limited in effect, generally three to six months from the employee’s leaving date.

Non-solicitation

This restricts an ex-employee from approaching a business’s clients and prospective clients after they have left.  The covenant can name clients with whom the ex-employee worked or alternatively forbid contact with any un-named clients with whom they would have worked within a certain time period, generally the 12 months leading up to the end of their employment.  Typically these clauses are also time limited to between three and twelve months from their leaving date.

Non-dealing

This clause is an extension of the non-solicitation clause preventing an ex-employee from dealing with previous clients or contacts at all, whoever initiates the contact.  Again, six to twelve months is the normal time period attached to such a restriction.  Both non-solicitation and non-dealing clauses can be very helpful if your business is seeking to protect your commercial contacts and information, which can also be protected by confidentiality provisions but they are notoriously difficult to enforce.

Non-poaching

This clause applies the same principles as the non-solicitation clause, but prevents an ex-employee enticing former colleagues to their competing or new business. They are principally used to restrict senior members of staff and do not prevent the poaching of junior staff. They normally have a post termination time limit of six to twelve months.

Garden leave

Once a member of staff has given notice, you could use a “garden leave” clause to prevent them from coming into the office, and prevent them from working during their period of paid notice.  This is designed to remove their access to those clients, contacts and employees protected by the previous clauses.  To achieve this, you can request your employees’ return items such as laptops, mobile phones etc and cleanse their “bring your own device” devices. Generally, time spent on garden leave reduces the length of the other restrictions.

How can I ensure the restrictive covenants in my employees’ contracts are enforceable?

To achieve enforceability of restrictive covenants each employees’ job role and seniority will need to be considered, as will the industry in question.  Having generic restrictive covenants for all employees is likely to render them less enforceable as you will be less able to demonstrate the relevant legitimate business interests in relation to each employee.  It is therefore vital to seek legal advice when including or reviewing these clauses in employment contracts.

If any part of a restrictive covenant goes beyond what is reasonable and necessary the court is likely to strike down the entire covenant.

There are several factors to consider:

  • The extent of the covenants – the restrictive covenants must be reasonable in terms of their length, geographic coverage and areas of business covered so that they only protect the legitimate interests of your business, and do not prevent the ex-employee from being able to earn a living.   A covenant which is seen as too long, covering too broad a geographic area or not limited to the specific industry or business area in which the employee works is likely to be unenforceable.
  • The legitimate interests of the business – if an ex-employee breaches their restrictive covenants, the burden of proof rests with you as the previous employer to demonstrate why the breach presents a significant risk to the future of their business.  You should identify the business interests you wish to protect, choose the appropriate covenant and tailor accordingly.
  • Seniority – there are certain roles in any business where employees’ access to clients and key contacts is essential and could present a risk should they take that information to a competing business.  For this reason restrictive covenants tend to be more enforceable in senior roles. 
  • Promotion and Review - if a member of staff begins their employment with potentially unreasonable restrictive covenants in their employment contract and they are then promoted to a more senior role or to a different department where they are more appropriate, the covenant could still be unenforceable as it was unreasonable when originally imposed. Conversely, an originally enforceable covenant may be rendered unenforceable by the employee’s change of role or the business’ change of focus.  You should therefore review covenants throughout an employee’s career with your business and particularly following any change of role.
Can I introduce restrictive covenants to employment contracts after commencement of employment?

It is recommended that restrictive covenants are included in an employment contract from the outset.  If this has not been done, you can introduce them during employment where a legitimate business need arises or is recognised.   An employee does have the right to refuse acceptance of such covenants, in which case you have several options.

The obvious one is requiring the change in consideration of e.g. a change of role, being admitted to the bonus scheme, or receiving a pay rise.  If that is impossible you could impose the change and/or threaten dismissal if an employee does not accept.  This can be risky territory as employees with more than two years service could bring claims for unfair dismissal.  Case law shows that if you can prove the restrictive covenants in a new employment contract would be reasonable and legitimately protect the business, the dismissal may be fair.  This does however, depend on the individual circumstances of the case and it is advisable, if you wish to implement restrictive covenants after commencement of employment, that legal advice is sought.

What can I do if a new employee has breached the restrictive covenants from a previous employer?

Breaching restrictive covenants is a very serious matter, not only for the new employee but also for you as their new employer for inducing the breach. The previous employer can bring legal proceedings against you both. When a new employee joins the business, you should communicate with them in writing that you are aware of the particular covenants from their previous employer and that under no circumstances must these be breached. Of course that will not work if it is a non-compete covenant and you are a competing business.

If you receive a letter from an employee’s previous employer stating they have breached their covenants, you should speak to the employee as soon as possible to ascertain the covenant they have breached and to what extent, and seek legal advice.  You should then communicate to the employee in writing that this is not acceptable, referring to the initial letter sent to them at the beginning of their employment, and explaining that their breaches must stop immediately.  By taking this action, you may have a defence to an assertion that they have induced a breach of contract.

What steps should I take if a previous employee has breached their restrictive covenants?

In this situation, you can seek an urgent injunction in the High Court against the employee to prevent them from continuing with the unlawful activity.  This is a temporary solution before proceeding to a full trial, but if obtained, is normally the end of the matter.  In considering the need for an interim injunction, the court will consider the possible outcome at trial and the adequacy of other remedies that may be available to you as an employer such as damages only, as well as the conduct of both you and the employee.  Such actions are not inexpensive and you should budget at least £10,000 to obtain an urgent injunction.  You should also be aware that the employee could then insist on taking the matter to full trial when costs of around £30,000 would not be unusual. Whilst employers may consider such costs would prevent them enforcing covenants, they might consider the effect on the rest of the workforce of not enforcing.  Taking one ex-employee to court may prevent others doing the same. 

If you are claiming for financial damages resulting from the breach, for example if the ex-employee has set up a competing business and they have secured a large client from you as their previous employer, you will need to show the financial impact the breach has had.  Such claims are however unusual and the employee may not have the resources to pay the damages.

If you are an employer wishing to implement, review or enforce restrictive covenants in your employment contracts, you can contact the Employment team on 023 8071 7717 or email employment@warnergoodman.co.uk

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