This guide explains the use of restrictive covenants in employment contracts. These are important clauses in employment contracts and can have significant ramifications. As such, employers and employees alike need to understand their rights when it comes to using and enforcing restrictive covenants in employment contracts.
A restrictive covenant in an employment contract limits an employee’s activities after their employment comes to an end. Specifically, they prevent employees from competing with their former employer after they leave. Such clauses make sound commercial sense for businesses - they prevent former employees taking ’trade secrets’ or a client base with them when they leave. In this way, they protect the good will and, to an extent, the intellectual property of the business. However, given that they impact a person’s rights and freedoms, they must be fair and tightly drawn in order to be valid. Restrictive covenants that are too wide in scope can be struck down by the court in whole or in part. Understanding how best to use restrictive covenants when employing staff is therefore essential.
A restrictive covenant limiting a former employee’s activities after termination of their contract is likely to be held to be void unless it can be shown that:
Including restrictive covenants in employment contracts should be carefully considered and drafted so both employer and employee understand the scope of the restriction and the duration.
Restrictive covenants typically protect against:
Save potentially for some types of confidentiality clause, restrictive covenants should be time limited. A restrictive covenant which lasts for more than 12 months is unlikely to be enforceable. To impose such a lengthy restriction would place an unfair impediment on the employee seeking to advance their career. The reasonableness of the time limit will depend on the nature of the restrictive covenant, the business, and the seniority of the employee.
Information requiring protection can range from research data on a company’s latest product to private information that would command a price in a tell-all piece about a high-profile family. Confidentiality can be preserved through non-disclosure agreements in:
To ensure confidentiality is protected through restrictive covenants, it is important to review the wording of covenants to make sure the clause remains fit for purpose.
A restrictive covenant in an employment contract is enforceable provided it is protecting a legitimate interest of the company and is reasonable in scope. Legitimate interests include:
An example of a reasonable restrictive covenant in an employment contract would be a post-termination ongoing requirement for confidentiality by an employee providing personal services, such as a nanny or bodyguard.
It is essential to draft restrictive covenants carefully because if the court concludes that a restrictive covenant is not enforceable as it is unclear or unreasonable in scope, the court will not rewrite the clause to create a restrictive covenant deemed reasonable and enforceable.
If a restrictive covenant is deemed valid and enforceable, an employer can enforce the restrictive covenant by:
If there is a concern that a current or former employee may breach a restrictive covenant, legal advice must be taken as soon as possible. The most common remedy is to obtain an injunction against the former employee. Such an injunction can compel a former employee to "deliver up" any confidential material in their possession.
It is also possible for an employer to claim a financial remedy from a breaching employee. To do so, they will have to show that a loss has arisen (either loss of profit or opportunity) and quantify that loss.
If a former employee has been induced to breach their restrictive covenant by a new employer, it is also possible to seek a remedy against that business.
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.