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Restrictive Covenants

Restrictive Covenants

What are restrictive covenants?

Your business will have valuable information that is integral to its success.  It is vital to protect the use of this information both during after an employee’s employment has ended.  An employee who has knowledge of your technology, strategic information, customers or clients and suppliers may be an attractive asset to your competitors

You can protect the use of valuable information through the use of what are known as restrictive covenants.  A restrictive covenant is typically a clause in an employment contract which prohibits an employee from doing certain things after the employee’s employment has ended for a specific period of time.

Restrictive covenant clauses may deter employees from using your valuable information and may warn off potential new employers. 

What is the starting point for interpreting restrictive covenants?

The starting point for any post-termination restriction is that it is void on the grounds that it is a restraint of trade and contrary to public policy.  It follows that employers are generally not entitled to protect themselves against competition from former employees.

However, the courts will uphold restrictive covenant clauses as enforceable if they are designed to protect the employer’s legitimate business interests and they extend no further than is reasonably necessary to protect those interests.

Legitimate business interests

The types of interests that the courts tend to allow are: 

  • trade connections – the employer’s relationship with its clients, customers, suppliers who may or not be associated with an employer’s competitor;
  • trade secrets and other confidential information –information about the employer’s business (eg price lists, formulae); and
  • stability of the workforce – the employer’s interest in retaining its employees.

Types of restrictive covenants 

The standard types of post-termination restrictions which can be used by employers are: 

  • non-compete – which restricts a former employee working in similar employment for a competitor of the employer;
  • non-solicitation – which prevents a former employee soliciting trade connections of the employer;
  • non-dealing – which prevents a former employee from dealing with the employers’ trade connections, regardless of which party approached the other;
  • non-poaching – which prevents a former employee poaching the employer’s employees; and
  • non-disclosure – which protects confidential information and trade secrets. 

Drafting restrictive covenant clauses

For restrictive covenants to be enforceable post-termination they must not be drafted too widely and employers must be mindful of certain factors and be able to justify them: 

  • the geographical area of the restriction;
  • the length of time of the restriction;
  • the activities that the employer is trying to restrict;
  • the type of interest being protected (eg trade secrets may be granted wider protection than customer information, given that its potential use across markets is wider); and
  • the employee’s position within the business (ie more senior employees will be in contact with more sensitive information, restrictions placed upon them may be justified as being more onerous).

A one-size fits-all policy on restrictive covenant clauses may risk the clause becoming unenforceable. 

Restrictive covenants should be periodically reviewed in order to maintain their enforceability as the reasonableness of the covenant is judged at the time it was entered into. 

The courts may have regard to what is standard practice in the industry with regard to such covenants and the above factors.

Garden leave 

During an employee’s notice period it is common practice to require the employee to spend all or part of this period at home whilst continuing to receive his/her usual salary and benefits known as garden leave.

The inclusion of a garden leave clause in an employment contract prevents the employee from taking up other employment with a competitor whilst enabling the employee's successor to develop relationships with the employee's customers and contacts.  Whilst on garden leave the employee is also no longer privy to the company's confidential information and what information they do have will become out of date. 

Garden leave clauses are subject to a test of reasonableness in relation to their duration and the longer the period, the less likely that they would be enforceable in full. 

Remedies for breach of restrictive covenants 

If an employee has breached post-termination restrictive covenants, the most common remedy sought is an injunction (or interdict in Scotland).  As part of an injunction application, an employee will be requested to “deliver up” or destroy confidential information.

Employers can claim a financial remedy or damages for breach of a restrictive covenant.  In such cases, the employer will need to show some loss resulting from the breach. This will normally be loss of profits on contracts lost to the former employee or new employer or opportunities diverted by the former employee. 

Where an employee has been induced into breaching restrictive covenants by a new employer (particularly a competitor company) a claim may bought against the new employer for damages flowing from that breach.  The new employer is likely to have greater financial resources to pay any award of damages made. 

Practical tips 

Legal action in this area can involve a substantial amount of time and money so it is important for employers to have clear strategy and a game plan is essential.

We recommend that you seek legal advice immediately. 

Contact our restrictive covenant experts today

If you are a business or employer seeking legal advice on employment restrictive covenants, please call our specialist employment lawyers on 01895 201719. Alternatively,please  email your details to employment@ibblaw.co.uk

Marc Jones

Marc Jones

Partner marc.jones@ibblaw.co.uk 01895 201719