An Employer’s Guide to Restrictive Covenants

May 22, 2023

Although an employment contract can be created verbally between an employer and employee, it’s always advisable to write down the terms so that there is less scope for disagreements or confusion later down the line.This is particularly important when it comes to any restrictions you, as an employer, want to place on your staff both during and after their time working with you.

This is where the concept of “restrictive covenants” comes in – these express (i.e. written down) terms serve to protect your business(including any confidential information) from being exploited or disclosed to your competitors by your current staff, or any ex-employees.

But, there are lots of rules surrounding their use in employment contracts, so this Guide aims to break down the jargon so that you can draft enforceable provisions that are also fair to your employees.

What are restrictive covenants?

A “covenant” is basically another word for a promise – and in the context of employment law (as there are different types depending on which area of law you’re focusing on), the promise is made by the employee to the employer (in signing their employment contract and agreeing to work with the business).

A “restrictive covenant” is a promise (from the employee) not to do something, and they should be expressly contained as a clause in a contract.

There are various implied and express restrictive covenants which apply to employees, and restrict their ability to:

·       Solicit i.e. try to take away from the business to another competing organisation, customers and clients,

·       Deal with customers and clients,

·       Poach i.e. entice fellow employees to leave the company and join another one, which is usually a competitor of the business,

·       Compete i.e. the individual themselves leaving your business to work for a competing company in the same market and industry, and

·       Disclose confidential information (including trade secrets).

We have created a table to help you understand all of these conditions and when they apply – in particular, note that there is a difference between what is acceptable during the individual’s employment compared with after termination or expiry of their contract.

Summary Chart: Applicability of Restrictive Covenants

** This may become problematic for employees that work remotely (whether partially during the week, or completely). Obviously, you cannot restrict your staff from working with other businesses in any region or territory (whether in the UK or otherwise) just because you technically operate (but do not have an established office presence) there. This would just be impractical, and unreasonable, so it is unlikely that any court, would allow it to be enforced when it came down to an interpretation of the contract in a dispute.

Are these negative promises enforceable?

It depends! Your classic lawyer answer (you knew it was coming…)

If you’re unsure, contact us and we can have a chat about your contracts in a bit more detail, but it’s worth bearing in mind that the first position a court would take is that restrictions will be void (WHAT??!!!- wait...) unless there is a genuine business interest to protect and the restrictions go no further (in time, activity and area) than is necessary to protect that business interest. So, if the clause is drafted too widely –e.g. it restricts the employee from working, in a completely different role, for 5 years post termination , in any country in the world – it will be considered unreasonable and void. Expelliarmus. Done-zo. Ciao.

How do we make our covenants better?

Start by thinking about why you want these covenants in place, and what it is you’re trying to achieve – are they to function as a deterrent, to prevent employees from trying to poach, solicit or compete? Or is it with a view to pursuing claims against individuals for breach of contract because you want to actually enforce them and try to get some money (i.e. damages) out of it? Once you have a clear idea of what your intentions are, you will be in a better position to draft a clear set of terms that are more likely to be enforceable, or be the deterrent that you’re after.

When you do come to put pen to paper, keep these clauses tight and clear in their language, (seethe Summary Chart above on factors to consider).

There is no “one size fits all” approach to this – the seniority of the individual employee will certainly have a bearing on how you draft these covenants. It follows that the more senior an employee is, the more likely they are to be in contact with the most sensitive information, and so tighter restrictions are more likely to be enforceable.

You should also always include a ‘severance’ clause in the contract so that, if in future you or a court needs to cut out anything unreasonable from the contract(what we lawyers call the ‘blue pencil test’), they can do so without removing the entire clause or rendering it (or the contract as a whole, in a worst case scenario) void.

Once you have a signed contract in place, don’t just leave it there to fester and rot in the background – conduct periodic reviews of your covenants in order to ensure they maintain their enforceability. Although the general idea is that the reasonableness of the covenant will be judged at the time it was entered into, you can demonstrate to a court that you have done your due diligence and been fair and reasonable by updating terms that need to be adapted, for example, due to a promotion, or other changes to the employee’s role, such as location of work, the information they have access to and the people they work with, etc.

Finally, be aware of the industry you work in – a court will take this into consideration when deciding whether or not a covenant is reasonable, as it may depend on the specific circumstances and context of where the role sits in a particular industry, and what is “standard practise”.

How does garden leave impact these covenants?

When you say goodbye to an employee, whether this is due to resignation, or termination , you might ask them to serve their notice period on “garden leave”. This essentially means that the individual is required to spend all or part of their notice at home, often without getting involved in any work, or communicating with any employees or clients of the business.During this time, they continue to receive their usual salary and benefits. However, as they will essentially be out of the market, their post-termination restrictions will be reduced by any period the employee spends on garden leave.

What do we do if an employee has broken these promises?

You might be in a pickle with an employee or ex employee who has breached one of your covenants and are trying to decide whether or not to bring a claim against them.

Come and speak to us!

We can review your contracts, discuss all the key details, and figure out what your options are(as there could be many). Deciding on the right path can be crucial to avoid things getting messy. For example, if an employee has technically breached their covenant(s), it may not be worth taking them to court if your actual losses are pretty low as any award could well be wiped out by legal costs.There’s usually the option to settle, or seek undertakings (promises (again)) from the ex-employee that they will cease to act in breach of their restrictions.

Key news and takeaways

To summarise, we think these are the key points to remember about restrictive covenants:

·      Restrictive covenants are like promises not todo something

·      Certain promises only apply during the term of employment, whilst others are only relevant after termination or expiry

·      You need to be very careful when drafting them to have the best chance that they will be enforceable!

·      The only widely accepted reason for employers to back up their covenants is because they are trying to protect a legitimate business interest (e.g. trade secrets or highly confidential information)

·      And finally, these promises should be limited in time, geographical area and should be reasonable if they are going to work.

Breaking News!

Recent updates to UK laws post-Brexit have revealed that the government plans to cap non-compete clauses at 3 months. The apparent intention of the government with this change would appear to be to provide employees more flexibility to join competitors or start up a rival business to their current employer, and we assume their hope is that the wider economy will benefit as a result. I would expect that many employers will be disinclined to agree with this given that many businesses are still struggling after the various upheavals over the last few years, and will not be happy about their ex-employees being able to compete more quickly!

If you need someone to review or draft your employment contracts, or those pesky restrictive covenants in particular, please contact us today and book a call with our employment team.

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