When you start working for an employer you will usually be asked to sign a contract of Employment. Within that contract there may be what are known as Restrictive Covenants. These are quite common, particularly in certain professions and are designed to protect the interests of the employer and their business.
What is a Restrictive Covenant?
All businesses have information that is crucial to the success of their operations, such as customer databases, technological or product information and so on. A Restrictive Covenant puts restrictions on the access or use of this information both during employment and after an employee has left the company. So for example, it would stop an ex-employee setting up in direct competition to their former employer and using their knowledge of the employer’s client list to approach customers with the specific aim of ‘poaching’ their business.
A Restrictive Covenant can be fairly generalised, or it can include specific restrictions such as preventing the employee from setting up in direct competition to their former employer within a certain radius of the registered business and/or within specified product lines. Effectively, a Restrictive Covenant provides a certain level of protection for employers both during an employee’s time at a company, and afterwards.
Is that Legal?
It is, but a Restrictive Covenant may be challenged by an employee in a court. However, as long as an employer can demonstrate that the Covenant is designed to protect his or her legitimate business interests, and that it is reasonable in relation to both geographic and time restrictions, it will most likely be upheld in the employer’s favour.
Types of Restrictive Covenants
There are four main types of Restrictive Covenants:
- Non-competition Covenants – these place restrictions on an employee to prevent them working for a direct competitor in a similar position
- Non-solicitation Covenants – these prevent employees from contacting customers, suppliers and other contacts of their former employer with the intention of ‘poaching’ their business
- Non-dealing Covenants – these prevent employees from having any direct contact with their former employer’s clients, customers or suppliers, even if the customer, supplier or client initiated the contact in the first place
- Non-poaching Covenants – these are similar to non-solicitation covenants but are specifically designed to stop former employees from ‘poaching’ other employees from their previous company. So this effectively stops an ex-employee ‘taking someone with them’ when they leave.
Geographic Restrictive Covenants
Part of a Restrictive Covenant may include what are known as ‘geographical parameters’. This means that the employee will effectively be prevented from setting up their own business in direct competition to their former employer within a certain area, for example, not within 50 miles of the employer’s registered business address. Obviously, if the former employer’s address is in a highly populated centre such as London, for example, and the employee also wants to set up their own business within the Capital then this restriction may be legally challenged as being an unreasonable restriction.
Restrictive Covenant Time Limits
Most Restrictive Covenants have specified time limits, and generally, they are confined to between 6-12 months. Any longer than this and a court may deem it to be an unreasonable restriction on the former employee’s ability to develop their own business interests.
Reviewing a Covenant
If an employee works for their employer for a long period of time, then it may be necessary to revisit their contract to review whether the restrictions put in place at the beginning are still relevant or, indeed, enforceable.
Sometimes, what is known as ‘Garden Leave’ will be included in a Restrictive Covenant. This clause allows an employer to specify that an employee should spend part or even all of their notice period at home to prevent them from starting work for a rival employer, while still receiving their usual salary and benefits. These are difficult to enforce, but may be used where once notice has been given the employer feels that the employee’s continued exposure to confidential business information may jeopardise the security of the business.
Restrictive Covenants are incredibly complex, and for both employers and employees challenging them can be very time consuming and costly. It is important that employers understand what they want to achieve with a Restrictive Covenant, and that the terms and conditions they’re laying out are fair to the employee, while at the same time protecting their own business interests. Employees should be absolutely sure that before they sign an agreement, any Restrictive Covenants are fair, reasonable and justified.
If you’re concerned about a Restrictive Covenant clause in your contract, or are an employer who wants clarification on what they can and cannot include in a Covenant.