We supported SHL to run a compliant collective consultation process, following the need to...
Restrictive Covenants are clauses placed within an employment contract that seek to stop the individual from doing certain things after their employment has ended.
These clauses receive special treatment from the Courts – unlike most other terms of the contract, they are void unless it can be shown that they are enforceable. As a matter of public policy, there is a belief that, to have a competitive economy, individuals should be free to use their skills and past experience as they wish.
Employers, understandably, find these clauses tricky to navigate, but if used correctly, they can be an effective way of protecting important interests – such as key clients, or trade secrets.
They are also often referred to as Post-Termination Restrictions, or sometimes just Restrictions or PTRs –making an already complex area even more difficult to follow!
Why should you consider putting Restrictive Covenants into contracts?
A written employment contract will contain terms about what can and can’t be done during employment. In addition to written terms, an employee will also owe their employer particular unwritten but implied duties - such as the implied duty of trust and confidence. If an employee acts against the interests of an employer during employment, even in the absence of written terms the employer will, at the very least, have recourse by virtue of various implied duties.
However, once employment ends, there is very little which automatically prevents an employee from acting against the interests of the employer. There is only limited protection, by way of ultra-sensitive, trade secrets (for example, the Coca-Cola recipe would be considered a trade secret).
This means that it’s best to consider placing Restrictive Covenants in the contract of employment, to give the employer some security immediately after an employee leaves.
Common types of Restrictive Covenants
There are a few common types of Restrictive Covenants:
- Non-solicitation – these restrict the enticing away of customers, contacts and clients
- Non-dealing – these restrict dealing with or contracting with customers, contacts and clients, even if they’re the ones who approach the individual
- Non-poaching – these restrict the poaching of colleagues
- Non-compete – these generally restrict competitive behaviour, for example preventing an individual from joining a competing business to do the same role, and are usually restricted to a geographical area – e.g. a particular town or city
Restrictive Covenants should always limited by duration (e.g. 3, 6 or even 12 months).
What can be protected?
To be enforceable, Restrictive Covenants must seek to protect a legitimate business interest, such as:
- A trading connection (a customer, a client, or a supplier);
- Confidential information or trade secrets;
- Workforce stability
There will be no legitimate interest when an employer is merely seeking to prevent the employee from competing more generally (for example, as revenge for them leaving).
When will they be enforceable?
To be enforceable, Restrictive Covenants must not extend any further than is reasonably necessary to protect the employer’s legitimate interest. In essence, they must be proportionate. If a Restrictive Covenant does go further than necessary, then the restriction will likely be unenforceable.
The Courts will often take the following into account when determining enforceability:
- the wording/suitability of the particular restriction in question;
- the geographical area that the restriction seeks to cover;
- the duration of the restriction; and
- whether the intended effect could have been achieved by a less onerous restriction.
As such, Restrictive Covenants need to be drafted very carefully if they are to be enforceable – they must be prepared in full consideration of the employer’s business and the actual day-to-day role of the individual in question. In a nutshell, they must be drafted widely-enough to be useful, but narrowly-enough to be enforceable.
Where should you put Restrictive Covenants, and when should you update them?
Restrictive Covenants should ideally be put in the employee’s contract of employment (either within the main body of the contract itself, or as an incorporated schedule). If you intend to rely on Restrictive Covenants, it is essential that the contract or document containing them is signed by the employee.
If an employee’s role changes (e.g. if they are promoted), then an employer should assess whether the original Restrictive Covenants contained within the contract of employment remain enforceable and fit for purpose. New Restrictive Covenants can be prepared and can take effect via a change of terms letter. Given that both the employer and employee need to agree any proposed changes to a contract of employment, it is often prudent to make a salary increase / promotion conditional upon acceptance of the new Restrictive Covenants (and any other changes). In reality, legal advice should be sought at this point, given the complexities, to maximise the prospects of the new Restrictive Covenants taking effect.
Does the uptake of remote working mean that you should check existing Restrictive Covenants?
Yes - if you already have Restrictive Covenants in your contracts, (well done, but…!) you should consider whether they are still fit for purpose following the increased uptake in remote working in the last four years. Sometimes Restrictive Covenants are drafted to restrict activity within a certain mile radius of an employee’s “place of work” (perhaps where an employer has a number of sites).
The intention might be that this covers a certain distance from a particular office location, but with remote or hybrid working, the “place of work” could actually be elsewhere (such as an employee’s home address). Remember, if the restriction extends further than is necessary, then it will be unenforceable – so it’s worth checking existing covenants and contracts to make sure the wording survives the WFH trend.
Other key points to know
- If an employee has been (genuinely) constructively dismissed, or another breach of contract has been committed by the employer, Restrictive Covenants will usually fall away and the individual will not be bound by any Restrictive Covenants (no matter how well drafted). Employers should be aware that employees may, tactically, seek to argue that they have been constructively dismissed, as means of arguing that they are not bound by them;
- If you think that an employee has breached a Restrictive Covenant, you should act fast and seek immediate legal advice on the best course of action. It may be possible to obtain an injunction (a court order) to prevent the individual from doing the prohibited activity in question. More widely, an employer could seek damages or an account of profits, if they have suffered loss following a breach;
- Before taking action, the employer should take into account the wider commercial considerations, not just the cost implications (which can be significant). For instance, if an employee has joined a client of an employer, it may threaten the employer’s own relationship with the client if litigation ensues. In such situations, often there is a compromise to be made.
If you would help in preparing or reviewing Restrictive Covenants, please contact our team.