A Guide to Restrictive Covenants

An employee leaving a company can often be in an advantageous position to take advantage of information about their former employer’s business, customers or other confidential information.

The use of this information could potentially cause harm to the former employer`s business as a result. There are a number of implied terms in an employee`s contract that must be observed however usually, these do not provide sufficient restrictions or extend to a period following the termination of the contract.

Inserting express restrictions (commonly known as restrictive covenants or post termination restrictions) into a contract can provide much stronger security and avoid any unreasonable damage.

It is fairly common to see Settlement Agreements confirming that the restrictive covenants initially contained in an employee’s contract of employment will remain in force and some may even attempt to impose new restrictions.

It is key to consider that when a court is determining whether they can enforce a restrictive covenant, the doctrine of restraint of trade is paramount as to whether a clause is void or not. Any term that is seen to be in restraint of trade will be made void unless and employer shows:

• It has a legitimate proprietary interest that it is appropriate to protect
• The protection the employer is seeking is no more than is reasonable having accounted for the interests of the parties and the public interest.

There are various types of restrictive covenants designed to limit any potential issues arising once an employee leaves, the main types are as follows:

Non-solicitation covenants

The main purpose for a non-solicitation causes is prevent the positive act of an ex-employee contacting a customer or client with a view to obtaining their business.

The period that any non-solicitation clause is put into place for and the customers that are applicable are required to be reasonable. Generally, this means that covenant would only apply to customers who the former employee dealt with during their time at the business and for a period that would allow them to have some influence over the business contacts.

The employee`s seniority in the business, the relevant market and length of similar restrictions placed into the employment contracts of other competitors may also be taken into account when determining reasonability.

It is extremely important to note that while it usually entails a former employee making the first move to solicit this business, it was found by the High Court that solicitation may still occur even when the former employee doesn`t make the first contact. It is always assessed relevant to the facts of the case.

To limit any former employee from making any contact at all with customers, regardless of solicitation, a non-dealing covenant should be considered.

Non-dealing covenants

A non-dealing covenant extends the restriction put into place by a non-solicitation clause to cover, not only positive actions from an ex-employee but also any dealings at all with a customer of the former employer.

This is clearly more advantageous to an employer as it imposes further restrictions on a former employee however a court becomes less likely to uphold it due to the increased scope being imposed; this type of restriction also affects decisions made by a third party.

Whether it is legally enforceable or not depends on the interest that is being protected. It will also become far more likely where an employer can establish a substantial personal connection between the employee and the relevant customers, and where the business environment is such that clear and apparent solicitation is not necessary for the employer suffer significant damage to their business.

It is common for a non-dealing clause to be used in conjunction with a non-solicitation clause as to avoid proving a former employee made an initial approach.

Non-poaching and non-employment covenants

A non-poaching covenant is to prevent a former employee from soliciting a current employee and taking them over to a different business. The main aim of this clause is to avoid any potential instability that this may cause.

Non-poaching clauses are often easier to implement than non-employment clauses as they seek to limit a third-party employee from seeing work elsewhere and so can cause a significant level of difficulty for an employer to provide justification for.

The length of these covenants are extremely important and usually they should be restricted to employees with more seniority; in previous case law a two year restriction to all employees in a business has previously been seen as unenforceable, however a clause in an employment contract that related only to directors and senior employees was shown to be valid.

Non-compete covenants

Arguably, the most commonly heard covenant is the non-compete clause. This clause prevents an employee from joining a competitor or from setting up their own rival business shortly after leaving a business.

They are difficult to justify however they can be enforced in certain circumstances. It may be that it isn`t possible to provide legitimate proprietary interest though confidentiality terms. If there is a sense of inevitability that an employee will use intimate details about the business in their future employment, then it is far more likely that the clause will be seen as reasonable – the restriction provides feasible security.

The influence of the employee over any customers or suppliers will also be taken into account. For example, if the influence is such that a non-compete clause is the only option to ensure the business isn`t significantly threatened.

Geographical restrictions

Geographical restrictions prevent employees from carrying out activities in a specified area, often defined as a radius around the former employer’s premises. The general rule is that the larger the restricted area, the more difficultly an employer will have in justifying the covenant. However this does depend on the circumstances of each case.

Geographical restrictions are no longer as common as they once were however some businesses still find their use appropriate. Usually these are businesses that rely more on local clientele rather than the wider area (such as hairdressers, small retailers, cafes etc).

A loss of clients to a local rival business could therefore affect these companies in a potentially fatal manner. A business that may be associated with a particular area (such as the legal sector in London) may struggle to restrict any former employees from operating in the area as it may prevent them from finding further work and therefore could be looked upon as an unreasonable restraint of trade.

What if they are breached?

If it can be determined that a restrictive covenant is valid and enforceable, there are several remedies available to an employer if they are breached by a former employee. Usually, it will be one of the following:

• Seeking damages from the employee – If a court determines that breaching a covenant has caused the employer loss then it may be determined that damages are payable by the employee. The loss needs to be assessed and it will then be adjudicated as to what remuneration is payable, if anything.
• Applying for an interim injunction – This remedy is the most common. If the breach is of a more serious nature, damages are usually seen to be insufficient and in these cases, an interim injunction may be granted. An injunction will enforce the restrictive covenant. A court will also consider who will be most prejudiced by granting the injunction, this known as the ‘balance of convenience’.

WHAT TO DO NEXT

If you are concerned about the restrictions contained in your own contract of employment, or are a business owner concerned about the damage employees leaving for a competitor can create, please get in contact with Daryl Smith on d.smith@oakwoodsolicitors.co.uk or call 0113 200 9942.