Employment law- Restrictive Covenants
What is a restrictive covenant?
This is a clause (or set of clauses) that are incorporated into a contract of employment or directors service agreement which seeks to restrict the actions of that individual after termination of their employment.
Whether they are looking to set up on their own or join a competitor, departing employees are likely to have acquired an insight into the employers confidential business operations, thus helping them gain an unfair competitive edge. Restrictive covenants play an important role in protecting an employer’s commercial interests from this threat, and they are widely used- especially if you have a senior role and one that is client facing.
What are the different types of restrictive covenants?
Restrictive covenants mostly fall into the following categories:-
This seeks to prevent you from working for a competitor for a set period of time after termination of your employment. This is usually 6 months, but can sometimes be 3 or even 12 months depending on your seniority.
Non-solicitation of clients
The non-poaching restrictive covenants aim to stop you having contact with clients/customers/contacts of your employer, usually for a set period of time after you have left (usually for 3,6 or 12 months for more senior staff). The restrictions can either be in the form of a “non-solicitation”, or “non-dealing” clause – the latter being more onerous as it is a more blanket restriction of dealing with the contacts, rather than limiting it to your actual “soliciting” those contacts for business.
This is the non-poaching of key employees, and is often becomes relevant where there are team moves (especially in banking circles).
How enforceable are restrictive covenants?
The general position is that post-termination restrictive covenants are void on public policy grounds as being in restraint of trade, unless they are being used by the employer to protect a legitimate business interest. Such an interest would include client and customer connections (including prospective ones), confidential information (such as trade secrets) and connections with suppliers. This is not an exhaustive list.
It is wrong, however, to assume that restrictive covenants will not be upheld by the courts. Whether such clauses are actually enforceable will always depend upon the particular factual circumstances of the case. However, the following principles will usually be taken into account:
- Any blanket attempt to deny an ex-employee the right to make a living in their chosen industry or profession is taken very seriously by the court and is unlikely to be enforceable.
- The clause must not be any more restrictive on the employee than is reasonably necessary in the particular circumstances to protect an employer’s business. If the clause is too restrictive then it is likely to be struck out as unenforceable by the courts. For example, if a covenant seeks to restrict your dealing with “all clients” (known as a “non-dealing clause) this may well be too wide and therefore unenforceable. If the clause, however, only seeks to restrict those clients that you have had a “material dealing”, and within 12 months prior to your termination date, then this is more likely to be upheld.
- Your employer must be able to show that they have a legitimate business interest which requires protection. They cannot simply seek to restrict you competing against them just for the sake of it. In fact, they need to be able to show your potential actions could have a detrimental effect on their business. Non-compete clauses are always more difficult to enforce, especially if the non-solicitation clause/non-dealing clause would achieve the same objective.
- What is reasonable will depend upon an employee’s position within the business. For example, it will be more reasonable to seek to restrict the actions of senior employees who are regularly in contact with the customers and contacts of the business than it will be to seek to restrict the actions of a junior member of staff. Even if you do not hold a senior position, restrictive convents are more likely to be upheld where an employer can establish a substantial personal connection with relevant customers, whether or not a decision is made to solicit them.
- If a non-dealing covenant prevents any contact with relevant business contacts it will not be enforceable because the restriction will not relate to the legitimate business interest to be protected.
How easy is it for your employer to introduce restrictive covenants retrospectively against you?
It is far safer for an employer to make sure that the correct restrictive covenants form part of the contract of employment from the outset. If, however, your employer would like to introduce a new restrictive covenant (or amend an existing one) after employment has commenced, it is free to do so provided you consent. In the absence of your consent to the contractual changes, your employer has two options:
1. They can unilaterally impose the change. If your employer forces the change without the your express consent, however, our may have a claim for constructive dismissal, in which you are forced to resign. Note, however, that it is possible you can still give implied consent to the change by way of conduct, for example, by not objecting to the change even though you may disagree with it.
2. They can terminate your employment and offer re-engagement on new terms. This is a dangerous position for any employer as the employee could make a claim for unfair dismissal if the employer was not seen to be acting reasonably.The courts here, have in some instances, come down on the side of the employer where there has been a “legitimate business interest” to protect, but most employers would be reluctant to go down this road unless they had to.
In order for the introduction of the covenants to be legally binding, your employer also needs to provide some “consideration” (in other words some value) to you for agreeing to the new covenants. This could be a pay rise, bonus or other kind of payment- usually a few hundred pounds will suffice. In some cases, the courts have held that simply offering an employee continued employment can amount to adequate consideration. Your employer would need to show sufficient evidence of any consideration.
What other circumstances are there where restrictive covenants may not be enforceable?
A tribunal will not find a restrictive covenant to be enforceable at a later date if it would not have been enforceable in the first place when the contract was entered into. If, for example, an employee is hired at a junior level at which time their employment contract contained too onerous covenants which would not have been enforceable at the time, an employee cannot “grow” into the covenants as they become more senior. The non-enforceability of the original covenants will not, therefore, change regardless of any increasing seniority which the employee acquires.
For this reason, employers may require employees to give a fresh acceptance of the old covenant on promotion, or request that they sign a new employment contract containing the new covenants. In addition (as also mentioned above) there needs to be “consideration” in return for an employee entering into a restrictive covenant. In other words, there needs to be “some real monetary or other benefit”. An offer of employment or promotion would be treated as a “benefit” for these purposes.
It may also be very difficult for your employer to enforce a restrictive covenant if you have not signed your employment contract. This applies especially to senior employees.
In addition, your employer may not be able to enforce restrictive covenants if there is a lack of consistency. In other words, if there are other employees on a similar level to you who have access to the same confidential information, they should all similar restrictive covenants. This makes sense, as your employer should not be able to selectively argue that they will suffer losses, if the restrictive covenants are not uniformly applied to other senior employees at the same level.
Can some unreasonable words be removed from a restrictive covenants clause to make the rest of the clause binding?
Yes, this may now be possible following a landmark ruling in 2019. What will be critical is if the removal of words would mean there is no need to add or modify any of what remains. This is referred to as “the blue pencil test“. The removal, furthermore, should not generate any major change in the overall effect of all the post-employment restrictions.
If you do have restrictive covenants in your contract, your options post-termination can be severely limited. This could leave you unable to start work with a new employer for the period of time set out in the agreement. This is usually for a 3-6 month period.
You may decide to ignore the restrictions when you leave and go and work for the employer of your choice, and taking your clients and contacts with you. You would, however, run the risk of your old employer issuing legal proceedings against you to enforce the restrictive covenants. They could seek an injunction restraining both you and your new employer from being in breach of the covenants. Such applications are rare, but you should nevertheless think carefully before overtly breaching your covenants otherwise it could be be a costly mistake.