With the Government currently reviewing restrictive covenants and whether or not they are stifling businesses in the UK, here are some practical tips on dealing with covenants during the course of employment and at the dispute stage.
What are restrictive covenants?
Restrictive covenants are provisions which bind an employee after the termination of their employment in order to protect the key business interests of the employer. They are usually included in a contract of employment.
The most common covenants are those which prevent employees from working for a competitor, soliciting clients, customers, prospects, contacts and/or former colleagues and those which prevent them from dealing with clients and/or customers for a specific period after their departure, usually between six and twelve months.
Employment contracts will also include confidentiality clauses which remain in force after the termination of employment.
Can restrictive covenants be enforced?
There is never any certainty that they will be enforced. It will depend on the circumstances of each case and how narrowly and carefully the covenants are drafted.
The general rules is that restrictive covenants are void on public policy grounds as being in restraint of trade unless they protect a legitimate business interest and are drafted narrowly so as to protect that interest. A legitimate business interest can be connections with a client or prospective client, confidential information relating to the business and its clients and close working relationships with colleagues.
The most difficult covenant to enforce is a non-compete covenant as this is seeking to limit the ability of an employee to work.
It is important to note that if a restrictive covenant is too long, the employer will not be able to enforce it. For example, covenants which are in excess of 12 months are unlikely to be enforceable. We advise employers to ensure that covenants are for a period from between 6-12 months only.
Moreover, if an employer seeks to use the same covenants for all employees irrespective of their seniority, it will be difficult to enforce these covenants. Ideally, covenants should be carefully adapted to reflect the employee’s role in the business. For example, a senior manager who has day to day contact with clients should not have the same covenants as an administrative assistant who is part of back office.
Before employment commences
- Restrictive covenants should be considered during the recruitment process and before making an offer of employment. The employer should ask the prospective employee about their covenants and request a copy of the relevant terms in their contracts of employment. The employer should study these terms carefully.
- If an employer is in any doubt as to what the prospective employee can or cannot do and if they are going to use their existing contacts as part of their new employment, it is prudent to seek legal advice on the enforceability of any covenants.
- If an offer of employment is made, it is prudent for the employer to state in the offer letter that they do not wish the prospective employee to breach their existing obligations.
- Proceed with caution at all times. Do not invite employees to “go around” their covenants or use any confidential information.
- If an employee’s role changes or he/she is promoted, the employer should use the change to the employment contract as an opportunity to review and update any covenants.
Post termination of employment
- The employer should consider the departing employee’s contract of employment and whether or not it can require the employee to spend all or part of their notice period on garden leave.
- The employer should make sure that a departing employee is aware of the restrictions that apply to him/her.
- As soon as an employer suspects that a former employee is in breach of any restrictive covenants, it should conduct a thorough investigation including all IT and telephone equipment.
- The employer should write to the employee as soon as possible with the concerns that it has about any breaches. The employer should also consider writing to the former employee’s new employer also to make him aware that the employee is breaching his covenants.
- Do not lose any time with doing any of the above. If an injunction application is going to be successful, the employer must act as soon as possible.
Failing to pay proper attention to a restrictive covenant in a new employee’s previous contract of employment could mean that the new employer is taken to court. Moreover, when an employee leaves their employment, key business could follow them to the benefit of their new employer who could be a competitor. This can be costly and time consuming and can be harmful to reputation.