Using Restrictive Covenants to Protect Your Business

Post-termination restrictive covenants are clauses in employment contracts designed to prohibit employees from taking certain steps after their employment has come to an end. The aim of such provisions is to prevent or limit the damage that an existing employee could do to the employer’s business with the knowledge they have gained and the relationships they have made during their employment.

How Do Restrictive Covenants Benefit Employers?

Departing employees may attempt to use confidential information, strategic plans, customer/client details or other information about their employer’s business to set up in competition or benefit their new employer. Restrictive covenants in employment contracts are beneficial to employers as they impede this and, indeed, often prevent it altogether.

In the event that an employer believes that a former employee has breached a post-termination restrictive covenant, they can take enforcement action by way of threatening, and if necessary commencing court proceedings for, an injunction and/or damages against the employee and/or their new employer or, if applicable, their new business entity.

Types of Restrictive Covenants

The standard types of restrictive covenants found in contracts of employment are:

  • Non-solicitation covenants – to prevent the employee approaching the clients, customers or suppliers of the former employer.

  • Non-dealing covenants – to prevent the employee dealing with clients, customers or suppliers of the former employer, irrespective of which party approached the other.

  • Non-poaching covenants – to prevent the employee poaching former colleagues.

  • Non-competition covenants – to restrict the employee from competing with the former employer i.e. by working for a competitor or setting up their own competing business.

The Importance of Carefully Drafted Restrictive Covenants

For a restrictive covenant to be enforceable, an employer must show that it is no wider than is reasonably necessary to protect its legitimate business interests. Legitimate business interests include:

  • protecting trade secrets and/or confidential information;
  • protecting trade connections with customers, clients or suppliers; and
  • maintaining the stability of the workforce.

When assessing the enforceability of post-termination restrictive covenants, the court will consider if they are reasonable, having regard to the interests of the parties and the public interest. It is not unusual for us to come across restrictive covenants which are drafted in such a way that there is little to no chance that a court would enforce them. To avoid the risk of unenforceable restrictive covenants, employers should tailor the covenant to the individual employee and take legal advice accordingly.

Further to the above, the question of reasonableness of a restrictive covenant will be considered at the time the covenant was entered into, so it is important to review them from time to time. For example, if an employee is promoted or otherwise changes role, their original restrictive covenants may no longer be appropriate or enforceable, and employers should review and update them as necessary.

The Importance of Incorporation

Even well-drafted restrictive covenants will not be enforceable if they are not properly incorporated within the employment contract.

It is common for employers to:-

  • enter into a binding agreement to appoint a new employee (often verbally), but to only issue a written contract containing restrictive covenants, and other terms and conditions which were not communicated prior to the appointment being agreed, afterwards; or
  • issue a first written contract, or perhaps an amended one, containing restrictions well into the employment

without the employee receiving any “fresh consideration”, i.e. anything in return for the new terms and conditions that they would not otherwise have received.

It is therefore also important to obtain appropriate advice and guidance in relation to the incorporation of restrictions, as well as their drafting.

Strategy

Last but by no means least, employers should be mindful that, if not handled correctly, to impose restrictive covenants, or any other new terms, on an existing employee can have implications for employment relations and, worse, can result in claims for breach of contract and, if the employee has more than 2 years’ continuous service, unfair dismissal; whilst collective consultation can be required where it is proposed to force contractual changes on 20 or more employees at one establishment. Strategy considerations are therefore another important aspect for specialist advice.

For further information, contact a member of Lanyon Bowdler’s employment team.