Restrictive covenants are clauses embedded in employment contracts aimed at protecting an employer’s business interests after an employee’s employment ends. These post termination restrictive covenants serve a crucial role in safeguarding trade secrets, client bases, and the overall stability of the workforce. These restrictive covenants in employment contracts limit specific actions by employees during and after their employment to maintain the business’s competitive advantage and confidentiality of information.
The primary purpose of these covenants is to protect legitimate business interests. This includes preventing the leakage of sensitive information and maintaining workforce stability by restricting employees from joining competitors or soliciting former clients. Restrictive covenants serve as a shield, defending the essential aspects of a business vital for its continued success.
Restrictive covenants come in various forms, each serving a specific purpose in protecting business interests. The most common types include:
Non-Competition Covenants: Non compete clauses restrict employees from working for a competitor or starting a competing business for a specified period, and often within a specified geographical location, after leaving their current employer. These clauses aim to prevent former employees from using the knowledge and skills acquired during their employment, and particularly confidential information and trade secrets, to benefit a direct competitor.
Non-Solicitation Covenants: These covenants limit employees from trying to solicit or entice business from clients or customers they interacted with during their employment, in competition with their former employer. The duration of such restrictions must be limited to what is a reasonable timeframe for the employer to protect its client interests, such as six or twelve months. This gives employers time to consolidate and maintain client relationships in the wake of the employee’s departure and ensures that departing employees do not poach valuable business contacts.
Non-Dealing Covenants: These covenants restrict former employees from engaging in any business dealings with specified clients or customers or prospective clients or customers after leaving the organisation. This helps to ensure that important clients remain with the original employer and do not follow the departing employee to a new business.
Non-Poaching Covenants: These help to protect the stability of the workforce by preventing former employees from attempting to recruit, or offering jobs to, key staff for a specified period of time.
Confidentiality Agreements: Confidentiality clauses are designed to prevent former employees from using or disclosing confidential information acquired during their employment. This is crucial for protecting trade secrets and sensitive business data from falling into the hands of competitors.
The enforceability of restrictive covenants hinges on several factors, including their duration, geographic scope, the nature of the employee’s role, and the nature of the business. Courts will enforce restrictive covenants only if they are well-drafted, reasonable, and necessary to protect legitimate business interests. Overly broad or lengthy covenants will be deemed unenforceable, as they unfairly restrict an employee’s ability to earn a livelihood and run contrary to the principle that former employees should be able to go about their future business without restraint.
To ensure enforceability, restrictive covenants must be clearly defined and reasonable in scope. Employers must demonstrate that the covenants protect specific legitimate business interests, such as trade secrets or client relationships. The burden of proof lies with the employer, who must show that the restrictions are reasonable in scope, duration, and geography. Factors such as the employee’s role, duties, seniority, the extent of their exposure to clients and confidential information, and the nature of the employer’s business, play a significant role in determining reasonableness.
Seeking legal advice is recommended when drafting enforceable restrictive covenants. Expert legal guidance can help in formulating clauses that are clear, unambiguous, and aligned with current employment laws and regulations.
When introducing new restrictive covenants, it is imperative for employers to obtain explicit consent from their existing employees, as implied consent will not suffice. Simply imposing a new covenant without the employee’s agreement can lead to claims for constructive dismissal, where the employee resigns in response to unilateral changes in their employment terms. To make the agreement legally binding, employers must also provide sufficient consideration, such as a salary increase or additional benefits, especially for existing employees. Consulting an employment lawyer can provide further guidance on these legal matters.
In some cases, under current UK law (see below), an employer may re-engage an employee on the new terms after terminating their employment if they refuse to consent to the new terms, but this approach must be handled extremely carefully to avoid claims of unfair dismissal, and in particular, a full and proper consultation process must be followed before terminating the existing employment contract. Employment solicitors can provide guidance in such situations.
Furthermore, the ability of employers to “fire and rehire” employees who do not agree to changes to their terms of employment is about to be severely curtailed and will render such dismissals automatically unfair. This is a reason to take legal advice on the suitability and drafting of restrictive covenants early, to avoid the need to try to make changes later.
When an employee breaches restrictive covenants, the most common legal remedy is an injunction. An injunction is a court order that requires the former employee to cease the prohibited activities immediately. This can be particularly useful in stopping a former employee from joining a competitor or soliciting clients.
Injunctions will only be awarded where damages are an inadequate remedy. The reason damages may not be an adequate remedy is that it is often very difficult in these cases to prove financial loss. That is why in these exceptional cases the courts may grant an injunction which will prevent the unlawful conduct from continuing, thus curtailing the harmful behaviour, rather than seeking to identify an appropriate level of compensation at some later stage. It is therefore essential that employers act extremely quickly to seek an injunction as soon as they learn of the breach. Delay will be fatal to any chance of securing an injunction.
In addition to injunctive relief, an employer issuing legal proceedings can seek a financial remedy for any financial losses incurred due to the breach. To claim damages, the employer must quantify their loss, proving how the breach has impacted their business.
In cases where a former employee profits from breaching their covenant, the employer may be entitled to a portion of those earnings.
If a competitor has induced the employee to breach their employment contract, the employer can also sue the new employer for damages.
Tailoring restrictive covenants to the specific role and seniority of each employee can significantly enhance their enforceability. For instance, senior employees with access to sensitive information may require more stringent restrictions compared to junior staff. Additionally, the geographic scope of a covenant should be limited to what is necessary for protecting the employer’s business interests.
Regularly reviewing restrictive covenants ensures they remain relevant and enforceable amid changing business climates. Revisiting and updating covenants is advisable whenever an employee is promoted or their role changes substantially. Compliance with current employment law and seeking expert legal advice when drafting or revising these covenants is also important.
Employers must carefully weigh the costs and benefits when considering legal action for breaches of restrictive covenants. Evidence of the employee’s unlawful actions is crucial. It is critical to take immediate steps to obtain solid information showing what the employee has been up to, such as trawling their work mobile phone and email accounts and carrying out a search of their work computers and servers that they used, for example to see if they have been sending confidential information to themselves or a competitor, or if they have been approaching clients or key employees about their plans.
Enhancing confidentiality obligations and/or restrictive covenants in settlement agreements can also provide additional protection if the original employment contract was inadequate.
Restrictive covenants continue to bind employees even after they resign from their positions (unless the resignation is in response to the employer’s own fundamental breach of contract). However, if an employee is dismissed without notice and there is no Payment in Lieu of Notice (PILON) clause in their contract, they will not be bound by these covenants and the employer will be unable to enforce them.
The reason for dismissal does not affect the enforceability of restrictive covenants, so long as the employee’s employment contract has been terminated in accordance with its terms. However, if there has been a fundamental breach of the employment contract by the employer, the restrictive covenants will be unenforceable as the employee will be discharged from any further obligation to the employer under the contract.
Garden leave is a strategic tool that allows employers to require employees to stay at home during their notice period while still receiving their salary. This practice helps maintain confidentiality and prevents departing employees from using confidential information against the company or from contacting colleagues or customers for the duration of their notice period.
For garden leave to be permissible, it must be set out in the employee’s contract. Although it can be costly to maintain an employee on full pay without requiring them to work, the benefits of protecting sensitive information and ensuring a smooth transition often outweigh the financial implications.
Former employees are typically required to keep their employer’s company’s confidential information private even after their employment ends. This obligation includes returning or destroying any confidential information stored on personal devices and returning company property.
Employers can claim damages for any loss resulting from the misuse of confidential information or apply for an injunction to prevent further misuse. It is crucial to ensure that former employees comply with these duties to protect the business’s interests post-employment.
Senior employees often have extensive personal relationships and access to sensitive information, making restrictive covenants particularly crucial for them. Courts typically view restrictions on key employees as more reasonable due to their substantial personal connections and influence within the industry.
Regularly reviewing restrictive covenants in relation to a senior employee’s changing role within the organisation is essential. The enforceability of these covenants relies on their specific role and the legitimate business interests being protected.
Team moves, where groups of employees are poached by competing businesses, present significant challenges for employers. In legal cases involving team moves, restrictive covenants, especially non-poaching clauses, play a crucial role.
Non-poaching clauses prevent former employees from recruiting their colleagues to join them in a new job or business, thus protecting the employer’s workforce. Non-dealing clauses restrict former employees from engaging in transactions with specific clients after leaving the organisation
Careful planning and execution of strategies are necessary to avoid unlawful poaching when recruiting teams from another employer. Quick action to prevent employees from being targeted is essential when anticipating a raid on a business’s own employees.
In summary, restrictive covenants are indispensable tools for protecting a business’s interests in today’s competitive market. From understanding the different types of covenants to ensuring their legal enforceability, employers must navigate these complexities with care and precision. Customising covenants based on employee roles, regularly reviewing them, and seeking expert legal advice are all critical steps in this process.
Ultimately, well-crafted restrictive covenants not only protect your business but also provide a clear framework for employees, ensuring that both parties understand their rights and obligations. By prioritising these measures, employers can safeguard their competitive edge and maintain the stability of their workforce.
What are restrictive covenants in employment contracts?
Restrictive covenants in employment contracts serve to safeguard an employer’s business interests by restricting specific activities of employees both during and after their employment. These clauses aim to prevent competition, protect confidential information, and maintain the workforce integrity.
What types of restrictive covenants are commonly used?
Commonly used restrictive covenants include non-compete covenants, non-solicitation covenants, non-dealing covenants, non-poaching covenants, and confidentiality agreements or NDAs. These agreements serve to protect business interests and sensitive information.
How can employers ensure the enforceability of restrictive covenants?
To ensure the enforceability of restrictive covenants, employers should draft them carefully, keeping them reasonable in scope, duration, and geography, while also ensuring they do no more than is necessary to protect legitimate business interests.
What remedies are available for breaching restrictive covenants?
For breaching restrictive covenants, legal remedies typically involve seeking injunctions to prevent further prohibited activities and financial compensation for any losses incurred.
What is garden leave, and how does it benefit employers?
Garden leave permits employers to require employees stay at home during their notice period while still being paid, which helps protect sensitive information and mitigate the risk of data misuse.
From drafting employment contracts and handbooks to navigating dismissals and redundancies, Arbor Law’s employment law specialists work with a range of start-ups and global businesses to guide them through the difficult employment issues that might arise in the workplace.
Get in touch to see how our expert lawyers can work as an extension of your business to provide comprehensive legal services and support.
This article has been reviewed and fact-checked by Fiona Morgan, a senior employment lawyer at Arbor Law.