Restrictive covenants are clauses in employment contracts that help prevent employees from taking unfair advantage of their employers when they leave.
This could include joining a competitor or starting up in competition to their previous employer within a few months of leaving.
Restrictive covenant agreements are also useful in preventing ex-employees poaching customers or current staff.
Restrictive covenants and employment law
In the UK, there’s a legal presumption that any attempt to restrain trade is unenforceable unless done to protect lawful business interests.
Like much of employment law, however, this is a grey area without hard and fast rules. A lot hangs on what the courts might consider a ‘reasonable’ restriction. Developing a sense for what’s likely to be ‘reasonable’ requires looking at previous court cases for specific industry sectors and job roles – not the easiest thing for a busy employer to do!
Restrictive covenants are made even trickier by the fact that even though the employee may have willingly signed up to them at the beginning of their employment, and agreed they were reasonable, the court will have the final view if you end up having to take legal action.
The general principle, though, is to carefully consider the minimum level of restriction that would protect your valid business interests without unduly restricting the employee when they leave your business.
By taking care to make sure your covenants do not restrict an ex-employee any more than truly necessary to protect your business, you’ll reduce the risk of a court determining your covenant unenforceable.
Types of restrictive covenants
1. Non-compete clauses: Competition in the same area of business
Non-compete clauses can be useful if there’s a risk that an ex-employee could set up their own operation in direct competition to you, using skills and know-how gained while working with you. They can also help prevent them from joining a direct competitor for a reasonable period.
These clauses are usually for a specific period of time and in a particular geographical area or they can be national if your business isn’t limited to a particular area. The more specific you can be in what you deem a competing business activity the stronger your covenant will be. For example, If you run a PR & Marketing agency whose client group focuses on the accountancy profession you wouldn’t reasonably be able to prevent an employee joining a marketing and PR agency with a different focus.
2. Non-solicitation clauses: Poaching customers or suppliers
If there’s a risk that an ex-employee will have strong relationships with any of your key customers or suppliers, then you can try to protect against them poaching these by including a ‘non-solicitation’ clause in your employment contract.
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3. Non-dealing clauses
These days with social media it is possible that even if an employee doesn’t attempt to entice customers or suppliers away from you themselves they may be approached by the customer or supplier directly. This type of clause is designed to stop them from accepting that work directly for a reasonable period.
4. Non-poaching colleagues
Similarly, you can also use a non-poaching clause if there’s a risk that an ex-employee could entice some of your other key employees away to work for them, taking their knowledge and skills with them and negatively impacting the stability of your team.
How to use restrictive covenants fairly and effectively
Restrictive covenants are a tricky component of employment contracts. Get them wrong, and in trying your best to protect yourself, you could find you’re completely unprotected if the courts deem your covenant unenforceable.
So how can you ensure your use of these clauses is effective?
1. Be reasonable
The biggest mistake we see employers making is including restrictive covenants that are too severe and therefore deemed ‘unreasonable’. This immediately renders them unenforceable. Although it may feel a little counter-intuitive, it’s best to err on the side of caution and seek the minimum level of protection.
While the Supreme Court has recently confirmed that a court may take out an unenforceable element of a covenant, leaving the remainder of the covenant effective, especially if there’s a specific clause in the contract saying that the parties are happy for this to happen, i.e. a severability clause, it’s always safest to ensure your covenant is robust and well drafted in the first place.
2. Be specific
It’s important to remember that restrictive covenants will not be applicable for all staff, and it would be unfair to include a blanket ban across all your employees. A Managing Director with full access to business plans and financial information, for example, poses far greater threat to your business than an administrative assistant with only limited access to information.
By including the same restrictions into all your staff members’ contracts, you make it far less likely that they will be enforceable.
3. Review regularly
If an employee is promoted or changes roles within your company, you’ll need to look again at their restrictive covenants and check that they are sensible for the new role.
Can I add restrictive covenants to an existing contract?
It’s possible to add restrictive covenants into employment contracts for existing employees, but you’ll need to consult with them and get their consent. Even where they’re happy to consent you’ll need to be able to show that the employee has been provided with some sort of additional benefits in return for entering into new restrictions. This is usually a pay rise or a promotion. It will be difficult to enforce new restrictions if there hasn’t been any additional benefit to the employee.
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