Restrictive covenants in employment contracts can be enforceable as long as they are deemed “reasonable”. The length of the restriction, as well as geography, seniority and impact on both your business and the future career of the departing employee, can all have a big impact on how enforceable the covenants are.
What Are Restrictive Covenants?
Employers face the challenge of securing and then retaining the best employees to help the business grow. Not only is there competition for customers, but also employees and directors.
Employment contracts regulate the relationship and obligations of both the employer and employee. Many employment contracts will contain what is known as restrictive covenants that are used to protect the employer when an employee leaves the business.
The restrictions prohibit the employee from acting in a way that may harm the business that they are departing from.
This may include becoming direct competition to your business or poaching your staff and clients.
Every business will have the technology, clients, information and strategic plans that it feels are integral to the success of the business and could damage the business if shared. That is where restrictive covenants come in.
Employers need to be careful to ensure that any restrictive covenants included within employment contracts are reasonable. If the restrictive covenants are not deemed to be reasonable by the courts, they could be unenforceable.
It’s also important to ask yourself if there has been any damage to your business before seeking to take legal action and enforce a restrictive covenant.
Find out 10 essential things you should know about restrictive covenants.
What Are The Different Types of Restrictive Covenants?
There are three common types of restrictive covenants used by employers in employment contracts:
Non-competition clauses
Non-competition clauses can prevent employees from going straight to work for competitors.
However, restrictive covenants cannot simply prevent competition. They need to be drafted to protect legitimate business interests, and should stipulate a reasonable time frame.
It is not reasonable for a restrictive covenant to stipulate that an ex-employee cannot ever work for your competitors as this will prevent them from making a living. This makes it a difficult clause to enforce.
Non-solicitation of clients
Non-solicitation prevents employees from poaching any clients and suppliers of their former employers.
The aim of this clause is to ensure that ex-employees do not make contact with your clients once they have left your employment.
Non-solicitation clauses normally last between 3-12 months depending on the seniority of the employee.
Non-poaching
Employees cannot poach their former colleagues if a non-poaching clause is included in the employment contract. Non-poaching clauses usually apply to employees who work in teams and prevent former employees from poaching other team members when they leave.
How to make restrictive covenants enforceable
The more convoluted and vague a restrictive covenant is, the harder it is to enforce.
Badly worded or ambiguous restrictions are likely to be thrown out by the courts.
They should be tailored to the individual employee and their role within the organisation. If you want to ensure that the restrictive covenant you use is enforceable, then you should be mindful of the following:
1. Keep the language simple and relevant.
2. Make sure the restriction is targeted and tailored to the employee – including their level of seniority.
3. Legitimate interests – the burden is on the employer to prove that the covenant is needed to protect the legitimate business interests, and you will have to demonstrate how any breach of it has adversely impacted your business.
4. Disputes over restrictive covenants rarely end up in court, most of the time the parties come to an agreement before matters reach court.
5. If you believe an ex-employee has breached their restrictive covenant, make sure you have sufficient evidence of the breach.
6. Make sure restrictive covenants are reviewed periodically to ensure they are still relevant and if you need to introduce new or updated restrictions then make sure the contract is updated and signed properly.
7. Before making a claim for a breach of restrictive covenant, ask yourself if you have suffered any loss. If you have not, then consider whether legal action is required. For example, if the employee has breached the restriction but there is no loss then a simple letter asking the employee to refrain from doing activities that caused the breach might be sufficient.
8. The most enforceable restrictions are those with a clear timeline. It is normal for there to be a 3 month notice period with a 6 month period of restriction. The longer the restrictive period the more likely a court might deem it to be unreasonable.
9. Consider whether a garden leave clause is required . This way the employee is still employed, but unable to work in the organisation during their notice period.
10. Leaving announcements – you might want to consider a restriction on the employee announcing they have left the business on social media platforms like LinkedIn.
Restrictive covenants that are detailed, restricted to specific time periods, and that relate to specific types of work, will work favourably for employers should they ever be challenged.
How Enforceable Are Restrictive Covenants?
The general rule when it comes to restrictive covenants is that it will be enforceable if it:
· Extends no further than reasonably required to protect the interests of the business, and it
· Protects the legitimate interests of the business
If the restrictive covenant meets these two standards then it stands a good chance of being enforceable. If a restrictive covenant clause is challenged by a former employee, then the onus is on the employer to show that the restrictive covenant clause is specific enough to be enforceable and is justified.
When trying to prove the restrictive covenant is enforceable, the employer should consider the following factors:
– The activities the restriction relates to and the breadth of those activities
– The geographical area of the restriction
– Length of time of the restriction (restrictions over 6-12 months are often difficult to justify)
– The interest being protected (ie trade secrets might get wider protection than general customer information that is already in the public domain)
– Whether the restriction is relative to the role of the former employee when they worked for the employer
Broader restrictive covenant clauses that cover a longer time frame can be harder to enforce. There is no one-size-fits-all restrictive covenant and they have to be carefully drafted to take into account the individual circumstances and role of employees.
Any attempt to prevent ex-employees from working in the field indefinitely is unlikely to be enforced by the courts. The restrictions must be reasonable and necessary, and the employer must be able to demonstrate that they are protecting a legitimate business interest.
How Can An Employment Law Solicitor For Employers Help?
Employers are only allowed to protect what is considered to be legitimate business interests and this means that any restrictive covenants in employment contracts have to be carefully worded to ensure they are enforceable.
In addition to working with you to ensure your employment contracts are drafted correctly, an employment solicitor can advise you on the enforceability of restrictive covenants.
If you feel that your business has suffered losses as a result of the breach of the restrictive covenants you could claim compensation for any losses and also seek an injunction against the employee.
An employment solicitor will also assist you with the following::
1. If the restrictive covenant is challenged by a former employee, then an employment solicitor will be able to advise the employer on the merits of the challenge and help prepare a counter-challenge.
2. Employment solicitors work with employers to carry out periodic reviews of restrictive covenants and employment contracts. This ensures that the restriction is still enforceable and applicable to the employees in question and that it is still deemed to be reasonable at the time it is entered into. Often employees start a role and within a few years, they may have moved into more senior positions. Normally, the more senior an employee the more likely they are to be in contact with key clients and sensitive information. Therefore, the restrictive covenants applicable to them need to match their role and responsibility.
3. An employment solicitor will also be able to advise you on whether a garden leave clause is needed. Garden leave is a common term that means employees are required to spend some or all of their notice period at home, away from clients and business operations. The benefit to an employer is that they do not have to worry about the employee having access to sensitive business information or important client contacts. For an employer to place an employee on garden leave, the employment contract needs to specifically have a garden leave clause within it, and an employment solicitor can advise whether such a clause is required or not.
4. Time is important if you feel that an ex-employee has breached a restrictive covenant. If you do not act quickly then you could lose the chance of having an effective remedy. A court will not grant an injunction if a long period of time has elapsed. Your employment solicitor is best placed to advise you on what action to take and will act quickly so you can get a remedy quickly.