Restrictive covenants

Restrictive covenants are often included within an employment contract by a business to protect their commercially valuable information from misuse after an employee resigns. 

You will either be required to agree them when joining a company, in which case they will form part of your employment contract, or your employer wishes to change existing contracts to include them when circumstances change. Often they will be included in a settlement agreement provided on termination of employment.

More employers are considering restrictive covenants to be an important part of their employment contracts to protect the commercial assets within their business.  This is a specialist area of law and a very rapid response to threats of legal action should there be a breach is almost always necessary.  Here we answer some of the most frequently asked questions about restrictive covenants, when they are enforceable and what you need to consider before handing in your notice.

What types of restrictive covenant are there?

There are several types of restrictive covenant that an employer can include in your employment contract:

Non-competition clause

This clause restricts you from working for a competitor, or setting up a competing business, and seeks to prevent you from taking confidential or valuable information to that competitor, which could give them an unfair advantage.  These tend to specify a certain amount of time after you have left your employer; often three to six months.

Non-solicitation clause

This clause restricts you from approaching your ex-employer’s clients and prospective clients, normally specifying clients you have formed relationships with in a time period leading up to the termination of your employment.  Typically these are also six to twelve months.

Non-dealing clause

This clause is an extension of the non-solicitation clause preventing you from dealing with previous clients or contacts at all, whether you approach them or they approach you.  Again, six to twelve months is a frequent period attached to such a restriction.

Non-poaching clause

This clause applies the same principles as the non-solicitation clause, but applies to taking former colleagues with you to the competing business or your new business.  The clause usually applies to senior staff and those who may have been your peers. The six to twelve month time limit is usually applied.

Garden leave

Once you have handed in your notice, under this clause your employer would prevent you from coming into the office, and could stop you working but you retain full pay.  This is designed to remove your access to those clients, contacts and employees protected against in the previous clauses.  To achieve this, employees will also be required to give back items such as laptops, mobile phones etc. Generally the six to twelve month restrictions will be shortened by a period of garden leave.

How enforceable are the restrictive covenants in my employment contract?

The enforceability of your restrictive covenants will depend on a number of factors pertinent to your situation; however there are some general rules that will determine how enforceable they are:

  • The breadth of the covenants – The restrictive covenant must be reasonable enough to protect your previous employer’s business without being too restrictive on you that you are not able to earn a living.  There is a notable difference between a covenant restricting you from working with a competing business ‘within the UK’ and one which specifies within a specific geographical area in which the business has a commercial interests.  Reasonableness of the time period will always depend on your particular situation, including seniority and pay and the particular covenant it refers to; 12 months may seem unreasonable in some industries or roles, while in others it may be reasonable when justified by a business case
  • Legitimate business interests – The burden is on your previous employer to show they have a legitimate interest for the restrictive covenant to be enforced, i.e. whether their existing commercial contacts, information and relationships will be at risk due to your actions if the covenants were not enforced
  • Your role in the business – Restrictive covenants tend to be more enforceable the more senior your role, as it is more likely you would have had access to key clients and contacts as well as valuable information about how the business works and thrives
Do I have to agree to restrictive covenants in my employment contract, either before or during my employment?

You cannot be forced to sign an employment contract with restrictive covenants; however, refusal may have serious consequences.   If you have been offered employment on conditional acceptance of the restrictive covenants, you may have the offer retracted if the employer deems them as vital to the role.  Any disagreement with the covenants should be specified to your potential employer in writing before you sign the contract in order to negotiate and avoid the situation that acceptance has been implied.

If you are already employed and your employer is seeking to issue a new employment contract with covenants included, again you are not legally bound to sign it, but there may be consequences of refusal including dismissal.  If you do not sign the contract and are dismissed with less than two years service, you are not permitted to bring an unfair dismissal claim.  If you are able to bring an unfair dismissal claim the Employment Tribunal would look at the employer's business need.  Case law suggests that such a dismissal may be fair but this would depend on the surrounding circumstances and the covenants you were being asked to sign.

What happens if I breach my restrictive covenants?

Breaching your restrictive covenants is a serious matter.  If you are considering this we would always recommend you obtain legal advice first.  Your previous employer could issue legal proceedings against you seeking to have the covenants enforced by a High Court injunction, normally giving very little time for you to respond and resulting in potentially very substantial legal costs for you to pay.

If your ex-employer obtains such an injunction, you would be liable for your own legal costs, and your ex-employer could also seek to recover their costs from you, as well as compensation for losses due to your actions.  While the burden would be on the employer to provide evidence of the breach of contract and subsequent damage to their business, the consequences for you could be far-reaching and jeopardise your new position or new company.  Your new employer may be included in the claim for facilitating a breach of contract.

I have breached my restrictive covenants and received a letter from my previous employer threatening action, what should I do?

The first step would be to seek urgent legal advice.  A response may be required in less than 7 days. We will be able to review the covenants you have been accused of breaching, and advise as to whether you have breached them and whether they are enforceable.

If the covenants are not enforceable, we can represent you when responding to the threat, arguing why they cannot be enforced and why there would be no loss to the employer.  If the covenants are enforceable, we can recommend the best course of action for you and investigate whether there is a viable counter claim for a breach of contract by the employer, which might make the covenants unenforceable.

We have many years experience of helping employees review their restrictive covenants as well as defending them should there be a threat of legal action.  If you find yourself in this situation, or you have further questions we have not covered here, then contact us on 023 8071 7717 or email employment@warnergoodman.co.uk.

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