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Restrictive Covenants in Employment Contracts

Restrictive covenants are sometimes used in employment contracts to prevent an employee from competing with the business, often during a set time frame, if their employment ends. Restrictive covenants are generally used to protect confidential information belonging to a business, as well as its relationship with clients. They can also be used to protect the workforce by preventing a departing employee from poaching other staff away from the business to a competitor.  

What types of restrictive covenants exist? 

There are various restrictive covenants that an employer may decide to include in their employment contracts: 

  • Non-competition covenants, which restrict an employee leaving the business from taking up employment with a competitor or starting up a competing business.  

  • Non-solicitation covenants, which again places restrictions on a departing employee from approaching clients, customers and supplies. The employee does not need to be the one to initiate the contact for this to still breach such a term. 

  • Non-dealing covenants, which prevent a former employee from contacting former clients, customers or suppliers. Again it does not matter if the contact was not initiated by the former employee. 

  • Non-poaching covenants, which prevent a former employee from attracting colleagues from the business away from their current employer to a different business. 

The covenants should clearly detail the restrictions including: 

  • Time frames 

  • What work is covered by the covenant 

  • Where there are any other restrictions, for example certain competitors that an employee cannot move to 

It is very important that any restrictive covenants are constantly reviewed and updated, particularly where an employee changes roles within the business. 

What is garden leave? 

Garden leave is frequently used in conjunction with restricted covenants to give an employer maximum protection. Garden leave requires an employee whose employment has been terminated to spend some or all of their notice period at home not working but still receiving full pay and benefits. 

The employee is still technically employed by the business during garden leave so this has the advantage of preventing them from moving to a competitor. The departing employee will not have access to any further confidential information. It also allows for a successor to be appointed to start building relationships with clients and suppliers.  

PILON 

Another option for an employer is to terminate an employment contract and immediately offer payment in lieu of notice (PILON). The post termination restrictive covenants remain in place but again the former employee no longer has access to sensitive material. 

When are restrictive covenants enforceable? 

In order for a restrictive covenant to be enforceable it must not be too widely drafted. If the covenant is challenged at any point by the employee, then it is for the employer to prove that the restrictions: 

  • Are justified and protect a legitimate business interest 

  • Are no wider than is necessary to protect those interests 

The aspects of the covenant that need to be kept specific include: 

  • The timescale: six months to a year are generally permissible but it is very rare for a restrictive covenant that is longer to be enforced 

  • The geographical area of any restriction also must be justifiable and should be as narrow as possible for its purpose 

  • The type of activities that the employer wishes to protect also cannot be very broad and needs to be limited to the specific roles that are key to the business 

  • What is being protected will also affect how broad the protection can be. So for example trade secrets are more likely to gain higher protection due to its value to competitors and the wider market 

  • The role of the employee will also be taken into consideration and the courts are more likely to agree to the enforcement of these covenants for more senior employees that are privy to sensitive and confidential information.  

What happens if a restrictive covenant is breached? 

Where there is a breach of a restrictive covenant then the employer can start court proceedings and seek an injunction. The employee will have to stop the relevant action and there will be a court hearing to determine whether or not there has been a breach of an enforceable covenant. The employer could also seek damages or compensation if they have suffered any form of loss due to the breach. The employer can also ask the courts to require certain undertakings are complied with. 

It is also possible for the business to sue a new employer that has enticed an employee to join their business in breach of a non-competition clause.

The information on this website is intended as a guide and does not constitute legal advice. Vardags do not accept liability for any errors in the information on this website, nor any losses stemming from reliance upon the statements made herein. All articles and pages aim to reflect the legal position at time they were published, and may have been rendered obsolete by subsequent developments in the law. Should you require specialist advice, tailored to your situation, please see how Vardags can help you.

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