Restrictive Covenants Explained
26 April 2016
Restrictive covenants contained in employment contracts are provisions within a contract of employment which seek to restrain an employee after the employment has ended.
There are many types of restrictive covenants but the most common types are, non-compete, non-dealing and non-solicitation (for example, in relation to clients and suppliers), non-poaching (of staff) and non-disclosure of confidential information covenants.
Putting aside the confidential information, the other clauses are subject to the common law doctrine of restraint of trade. This doctrine reflects the public interest in ensuring that persons are free to exercise their skills and calling and earn a living.
Under the doctrine, restraints are void and unenforceable, even if they form part of the employment contract, unless they are no wider than reasonably necessary to protect the employer's legitimate interests. A restrictive covenant should only restrict the employee's activities enough to protect the employer's legitimate interest and should not be wider than is reasonably necessary to the interests it seeks to protect.
To assess what is reasonably necessary, a three stage test is used by the Courts:
- The Court has to decide what the covenant means.
- The Court will consider whether the former employer has shown that it has legitimate business interests requiring protection in relation to the employee's employment.
- Once the existence of legitimate protectable interests has been established the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests.
If the restrictions are unreasonably restrictive they will not be enforced by the Court. If an employer considers an employee, or former employee, is in breach of the restrictions, the employer can apply to a Judge at short notice for an injunction which can mean the employee has to stop working if the employee is in breach of the restrictions. The Judge can order an injunction without giving the employee the opportunity at that stage to put their side of the case (this is known as an ex-parte injunction).
In addition, the employee can be ordered to pay damages to the former employer resulting from the breach. Sometimes the former employer will also make a claim against the new employer. As you can see the consequences of breaching restrictive covenants can be serious for the employee concerned.
In practice there is considerable uncertainty over how a Court will construe restrictive covenants in any particular case and the following can all influence a Court's approach and decision:
- The nature of the employer's business and the industry in which it operates can influence how a Court would construe the covenants, in particular, when assessing the legitimate business interests which the employer is trying to protect.
- Restrictive covenants are always reviewed from the perspective of circumstances that existed at the time the contract was entered into by the parties. Consequently, over time they can become less effective and a sensible employer will usually update them.
- It is also of note that a company cannot enforce restrictive covenants if it is in breach of the contract of employment.
If you have left your current employer or are thinking about leaving and your contract of employment includes restrictive covenants or post termination restrictions, you should seek expert legal advice.