Here at Thrive, we regularly advise on Restrictive Covenants; their drafting, their enforceability, and potential breaches. This blog is your ultimate guide to restrictive covenants.
What is a restrictive covenant?
Within an employee’s contract of employment, some businesses choose to impose post-termination restrictions, to protect the business’s interests after an employee has left. The restrictive covenants essentially set out particular behaviours and activities that the employee cannot carry out post-employment, usually limiting that employee’s ability to use the information they gain in their employment and contact or poach the business’s clients.
What is the purpose of restrictive covenants?
Most businesses, especially professional services, are likely to have confidential information and strategies which are crucial to the success of the business. This creates a need for restrictive covenants because, if an employee took the confidential information to a competitor, it could cause difficulty in that clients may choose the competing business. This in turn could cause a severe financial detriment to the former employer.
Restrictive covenants can also prevent an employee from poaching staff, taking clients to their new employer, and working in a similar employment for a competitor.
Examples of confidential information and business interests protected by restrictive covenants:
- Client contact details
- Price of services
- Business strategy
Types of restrictive covenants
The below are not an exhaustive list of restrictive covenants but are of standard use:
- Non-dealing – this limits a former employee from dealing with any competing businesses;
- Non-competition – restrictions on the former employee working for a competing business;
- Non-poaching – a former employee cannot take staff to their new employment, or encourage them to leave their employment; and
- Non-solicitation – this prevents a former employee from taking clients, customers or suppliers or from encouraging them to leave the former business.
Are restrictive covenants enforceable?
The starting point is that restrictive covenants are void, as they are seen as a restraint on trade. In order to ensure the best chance that restrictions will be found to be enforceable, they must be specific in terms of geographical location, time frame, nature of the business, role, seniority, and exactly what it is that the former employee cannot carry out. Any restriction that is deemed unreasonable, for example, drafted for too long a time period, could be found to be unenforceable despite it being in the signed employment contract.
This is because a restrictive covenant cannot amount to a restraint of trade. Ultimately, an employee has a right to work, and a right to continue to have an income, so a restrictive covenant cannot be so wide and unreasonable that it makes this impossible.
Whatever the restriction is must protect a legitimate business aim; for example, ensuring more senior employees don’t take clients for their own financial gain.
An example of a restrictive covenant that is unlikely to be enforced is asking a junior member of staff not to work for a competitor for 12 months when they have not had access to clients or their contact details and are not involved in any business strategy meetings. Should this restriction be placed on a Senior Director, it is more likely to be found reasonable and therefore enforceable.
Similarly, a restriction which limits a hairdresser from working at any salon throughout the UK is likely to be viewed as a restraint of trade which will therefore be unenforceable. However, a restriction which limits them from working for a competitor within a five-mile radius of their previous salon, is more likely to be enforceable and it limits the sharing of confidential information to benefit a clear competitor.
To avoid any misunderstanding that could lead to legal action, employers should ensure that they consider their aims and objectives prior to placing any restrictions on an employee. This includes ensuring that the restrictive covenants are reasonable and fair, and drafted on an individual basis. Having blanket restrictive covenants, rather than tailoring these to each individual, makes them weaker and does not give the employer the best chance of being able to rely on them should they need to.
Finally, the reasonableness of any restriction will be judged on whether it was reasonable at the time that it was entered into (so when the contract was signed) as opposed to at the time the former employer seeks to enforce it. Therefore, if a junior member of staff has restrictions within their contract which are unreasonable at the time they enter into them (for example, too restrictive for their seniority and position) but after, for example, a promotion, the restriction later becomes reasonable, the covenant remains unenforceable. Employers should therefore seek fresh acceptance of any restrictive covenants where the position or seniority of an employee has changed.
For the strongest possible situation, an employer should seek legal advice when drafting restrictive covenants to ensure that they are enforceable.
Did you know we provide outsourced HR services to businesses?
Using Thrives HR services makes your life easier; we provide you with quick and most importantly, correct HR advice so that your staff management is stress-free and sufficient. We take care of everything. From drafting contracts and handbooks tailored to your business to advising and supporting you through redundancies. There is no limit to our knowledge; if you have an HR question, our qualified solicitors have the answer for you. We are always one phone call or email away.
Why should you outsource your HR services to solicitors? Getting your HR services from a solicitor means, should a case ever proceed to tribunal everything we have ever discussed is protected by legal privilege meaning all conversations are protected. Whereas if you were to use a HR consultant, all conversations and documentations regarding that employee would be disclosable in tribunal.
Get in touch today to invest in your business and make your HR stress free. Contact us at firstname.lastname@example.org
By Annabelle Oliver and Alicia Collinson
Please note this blog is for reference purposes only and is only accurate at which the date it was published. It does not constitute legal advice and should not be relied upon as such. Specific Legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any actions. Please contact us if you have any questions on email@example.com.