Jones Chase have issued this bulletin to help individuals and companies alike. Ensuring good drafting of restrictive covenants, also known as post termination restrictions, in employment contracts or otherwise, is both vitally important to those seeking to enforce them and the employees restricted by them.
In our experience, restrictive covenants tend to be a contractual feature not thought about until that critical moment when you or someone you employ is leaving to join a competitor. Uncertainty and ambiguity in the drafting can result in an unenforceable clause, contribute to a significant relationship breakdown and substantial time spent and costs incurred for both employers and employees alike.
Whether you are a business owner or HR professional drafting and issuing employment contracts or an employee with an employment contract which contains restrictive covenants, you will have a vested interest in their enforceability.
The information set out in this bulletin is accurate as of 15 June 2022.
Restrictive covenants – a recap of the basics
In every employment contract (whether set out expressly in writing or orally agreed) there is also always an implied duty to keep employer information confidential during employment. This implied duty extends beyond the termination of the employment, but only to the extent that it protects trade secrets. Therefore, in order to protect anything other than a trade secret after the end of the employment contract, an express contractual term is required, hence the name “post termination restriction”.
Post termination restrictions, or restrictive covenants as they are sometimes called, often go beyond protecting confidential information. Usually, express clauses (these can be written or oral) try to protect an employer’s confidential information, customer connections, goodwill and workforce. In relation to restrictions they should always be in writing. Restrictive covenants will be drafted to restrict activities for a limited period of time and within a certain geographical radius.
The typical restrictive covenants found in employment contracts are the following:
- Non-compete – which seeks or actually prevents ex-employees going to work for a rival employer/competitor.
- Non-solicitation – which endeavours to prevent ex-employees seeking to or actually enticing clients and customers or potential clients and customers to move with them, whether the ex-employee is moving to a competitor, or not.
- Non-dealing – which prevents ex-employees doing business with clients, potential clients, customers, or potential customers, whether the ex-employee is moving to a competitor, or not
- Non-poaching – which attempts to prevent a former employee from taking fellow work colleagues with them, when leaving, again whether to a current competitor, or not.
Depending on the business concern there can also be similar restrictions relating to supplier and or brokers etc.
Enforcing restrictive covenants
In order to successfully rely upon express contractual post-termination restrictions/restrictive covenants, the clauses must satisfy certain criteria. Here are our 10 practical tips for those looking to rely on restrictive covenants or alternatively be free of them.
- Check if the clauses are properly incorporated into the employment contract
To be enforceable, restrictive covenants must be incorporated into the employment contract. Usually, restrictive covenants are introduced at the start of an employment relationship. This is the most obvious way of introduction. There must be an offer, acceptance, and consideration (usually the job itself).
Introducing restrictive covenants during employment is less straightforward. They must be introduced as a contractual variation with the consent of the employee and in return for consideration, for example a pay rise or a one-off payment.
Employers often seek to introduce restrictive covenants at the end of the employment relationship. This however must also be with consent and in return for consideration, for example a one-off payment. This is usually achieved through a settlement agreement.
If restrictive covenants have not been properly incorporated, they are unlikely to be enforceable.
Areas to watch out for: secondment of employees, promotion, and the introduction of a new contract, TUPE transfers, also where the employer becomes part of a new group of companies.
- Think about what your business or your employer is seeking to protect. Restrictive covenants must be designed to protect a legitimate interest
To be enforceable, restrictive covenants must be seeking to protect a legitimate business interest, this is over and above simply seeking to prevent competition.
What constitutes a legitimate business interest will differ from employer to employer, but the obvious examples include trade secrets, processes, price lists, client lists and client relationships. An employee cannot be restricted from joining a competitor simply because they are good at what they do. In that instance, the non-dealing, non-solicitation and non-poaching clauses, are often sufficient to protect the legitimate business interest. When deciding whether to allow an employer to rely upon the restriction a judge will balance the right of an employee to work and earn a living against the business interest the ex-employer is asserting. If an ex-employer cannot identify an interest it is genuinely trying to protect and which could cause a detriment if not protected, it is unlikely to be enforceable.
Areas to watch out for: being clear what is a business interest, and ensuring this is made clear to employees, the level of seniority of an employee and what is shared with them. How can you police the ex-employee’s activity to be certain the business interest is protected?
- Carefully consider the duration of any restriction
Assuming that an employer does have a legitimate business interest to protect, a restriction will still only be enforceable if it only lasts the period for which it is needed. This is fact-specific. For example, when deciding how long an ex-employee needs to be restricted from soliciting or dealing with the clients it had whilst employed, employers need to realistically consider how long it will take to rebuild its relationship with those clients.
Areas to watch out for: keep a connection between what happens operationally and what type of restriction is being sought. If marketing plans for customers are updated every 6 months, attempting to restrict an employee from not soliciting, nor dealing with customers for 12 months is very unlikely to be enforceable as the duration does not match what happens in reality.
- Consider the appropriate geographical radius of the restriction
This is only relevant to restricting an ex-employee from joining a competitor. A non-compete will be unenforceable if the geographical radius is too wide. For example, if the restriction is silent on the geographic area or it refers to working anywhere in the world for 6 months post-termination, and the employee has only ever worked in the UK, it is very unlikely to be enforceable. Again, restrictive covenants will only be enforceable if they protect a legitimate business interest and attempting to enforce an unnecessarily wide geographical radius will be going beyond what is required.
Areas to watch out for: if an ex-employee left to work for a competitor, would the location in which they are working impact the company? If yes, make sure the restriction covers that area.
- Be reasonable
Restrictive covenants must be both reasonable between the employee and the employer and reasonable in the public interest.
Carefully consider the duration and geographical scope of the restriction, to make the restriction reasonable for both the employer and the employee. Then consider if it is reasonable in the public interest. For example, attempting to enforce a restriction on an individual in the field of medical science, that would prevent the development of products which would benefit the public, may not be enforceable.
This is a relatively rare issue, but worth being aware of.
- Beware of using standard form/template employment contracts
Whether you are issuing employment contracts or seeking to disregard your own restrictive covenants, the devil is in the detail. Issuing a standard form contract to all employees with the same restrictive covenants is almost never the right thing to do unless all that is needed is a deterrent rather than a potentially enforceable clause. If the restriction clause does not satisfy the criteria listed at tips (1)-(5) above, it may be held to be unenforceable which leaves the ex-employee free to do whatever they want wherever they want.
Areas to watch out for: an employer will almost certainly not be able to convince a High Court Judge that a senior director with a presence across the whole of the UK and access to all company confidential information and influence over all company customers, poses the same threat to the business as a junior sales assistant who only works in London.
- Review, review, review
As above set out above at (1), restrictive covenants should be provided at the start of employment. They should also be reviewed each time the employee is promoted and/or given a pay rise, to ensure they are still relevant. Not only is this good practice given the likelihood that an employee will be privy to more confidential information as they become more senior and may need stricter restrictions, but also because case law has confirmed that when considering the reasonableness of restrictive covenants, they will only be reviewed against the job title and seniority of the employee at the time they were entered into and not any more senior role they have been promoted into. Therefore, even if the restrictions are reasonable for the current senior position that an employee holds, they will still be unenforceable if they were too wide for the position in which they held when they signed up to the restrictive covenants.
Areas to watch out for: these are “living clauses” make a date in your diary to review and make sure the clauses are fit for purpose on a regular basis.
- Think carefully before bringing or facing enforcement proceedings
The remedies available for an employer if it believes a former employee has or intends to breach their restrictive covenants, are:
- injunctive relief
- damages
- declaration
- undertakings
These must be sought in the High Court and the management time and legal costs in collating information to seek any of the remedies above can outweigh the benefit of enforcement.
Employees should not take too much comfort from this, as the High Court can award the costs of all parties to the losing party to pay. Therefore, if you are taken to court for allegedly breaching a potentially enforceable restrictive covenant, you could face paying your ex-employer’s costs of having to start the court proceedings.
Areas to watch out for: any ex-employee seeking a new role should provide a copy of their restrictions to the potential new employer to make it aware of any limits that could be placed on them. Check if any period spent on garden leave “eats into” the period of restriction, as this can reduce the time spent not being able to work.
- Be aware that the Court can only strike out and not amend restriction clauses
Before considering any legal action, an employer must ensure that the clauses in question satisfy the conditions of enforceability. This is because an important and noteworthy feature of restrictive covenants is that the courts will not rewrite a clause to make it reasonable or limit its scope. The courts can however strike out part of the clause, which is deemed unenforceable provided that the remainder of the clause after the deletion requires no modification or adaptation and would not generate a change in the overall effect of the clause. This is commonly called the “blue pencil test” .
Areas to watch out for: as stated above, be realistic in what the employer wishes to protect based on what actually happens operationally. Some employers have put lists in clauses e.g. the duration is for; 3 months, 6 months, 12 months, to allow for a deletion as appropriate. This is not an acceptable route to try to take advantage of the blue pencil test mentioned above.
- Watch out for employer breaches of contract!
If an employer terminates an employment contract in breach of contract, for example not paying notice pay, or behaves in a way that entitles the employee to resign and claim constructive dismissal, any restrictive covenants within the employment contract will be unenforceable and the ex-employee is free to take employment wherever they like and deal with or solicit away clients or customers, should they wish. The reason for this is the employer cannot rely upon terms in a contract which it has, itself breached.
Bespoke consultation
If you require advice on any of the above, want assistance with drafting restrictive covenants or challenging their enforceability, please feel free to get in touch. We would be delighted to provide you with a bespoke consultation on your options and a tailored plan to benefit you or your business.
Jones Chase is a specialist employment law firm based in the centre of London with an excellent track record of looking after those that we assist.
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