Employment Knowhow: Restrictive covenants

Most employers wish to protect their confidential information, customer and client details or other information about their business, especially with departing employees. One of the ways to do this is for employers to insert clauses into contracts of employment, usually for senior employees or those with unfettered access to such information, which seek to restrict the conduct and activities of that individual after the termination of their employment. Such clauses are known as post-termination restrictive covenants. In order for such clauses to be enforceable and not void because they are in restraint of trade, they need to be carefully drafted.

Types of post termination restrictive covenants

Restrictive covenants generally cover the following issues:

  • Non-solicitation – such a clause seeks to prevent individuals approaching their ex-employer’s current or prospective clients, customers or contacts with a view to doing business with them.
  • Non-dealing – the purpose of this type of clause is similar to a non-solicitation clause. However, it is more onerous as it seeks to prevent an individual having any dealings with their ex-employer’s clients, customers or contacts even where the client has made the approach.
  • Non-poaching – this clause prevents an individual taking their ex-employer’s staff with them to their new employment or business.
  • Non-compete – this is the most onerous and the most difficult to enforce as the clause seeks to prevent individuals working in a similar capacity for any competitor or setting up a competing business for a set period of time after the termination of their employment.

Enforceability of restrictive covenants

The general position is that restrictive covenants are not enforceable/are void on public policy grounds for being in restraint of trade unless the restriction does not go any further than is reasonably necessary to protect the employer’s legitimate business interests.

Broadly speaking, legitimate business interests can include:

  • trade connections – (i.e. the employer’s customers, clients or suppliers and more generally goodwill);
  • trade secrets and confidential information; and
  • the employer’s workforce.

Scope of the restrictive covenant

In determining whether a restrictive covenant is enforceable, the courts will also look at factors such as whether the restriction is reasonably limited in time and geography and whether the clause is wider than necessary to protect a legitimate interest. The decision of the courts will depend greatly on the specific facts and circumstances of each case. The courts are less willing to enforce restrictive covenants in contracts of employment than in other types of contracts (for instance partnership agreements and share sale agreements).

Even if a court determines that a clause is too wide to be enforceable, in certain circumstances the courts can sever the offending part of a restrictive covenant to allow the employer to rely on the remaining part of the clause. This is known as the “blue pencil” test. However, courts will not rewrite a clause to make it enforceable.

Enforcement action

There are a number of options available to an employer if a restrictive covenant is breached. An employer can apply for:

  • An injunction to prevent the ex-employee breaching the restrictive covenant.
  • Damages where the employer has suffered financial losses due to the breach.
  • An account of profits where the ex-employee or new employer has benefited from the use of confidential information.
  • An order to ‘deliver up’ documents in the ex-employee’s possession, for example, customer lists.

A restrictive covenant must carefully balance the right of the employer to protect its legitimate interest and the right of the employee to use their skills for the benefit of themselves and the public.

Employers should carefully consider and seek legal advice on the scope and enforceability of the restrictive covenant and the steps to take where a clause has been breached.

Equally, employees should also seek advice on the enforceability of restrictive covenants as such clauses can severely limit their options post termination if they are enforceable, and there are potentially serious and expensive consequences to breaching a valid restrictive covenant.

This page was updated on the 1st August 2018.

This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of October 24, 2018.