Restrictive Covenants in Employment Contracts

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.

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.

USING RESTRICTIVE COVENANTS IN EMPLOYMENT CONTRACTS

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:

• The restrictive covenant protects a legitimate interest that is appropriate to protect, and
• The protection sought is no more than is reasonable in the circumstances

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.

TYPES OF RESTRICTIVE COVENANT

Restrictive covenants typically protect against:

• Non-solicitation – to prevent a former employee from actively contacting a customer to secure their business
• Non-dealing – to stop a former employee from dealing with a customer if approached by the customer 
• Non-poaching - to prevent a former employee encouraging current employees to leave their employment
• Non-compete – to stop an employee from joining a competitor business or setting up a new business
• Geographical restrictions - to prevent a former employee from working in a defined area
• Confidentiality – to protect confidential information. There is an implied term in every contract of employment to protect confidential information from use by a former employee but it is preferable to rely on a well-drafted restrictive covenant.

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.

PROTECTING CONFIDENTIALITY

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:

• Employment contracts
• Confidentiality agreements
• Settlement agreements negotiated on termination of employment

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. 

ARE RESTRICTIVE COVENANTS IN EMPLOYMENT CONTRACTS ENFORCEABLE?

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:

• Trade secrets and confidential information
• Customer relationships
• Preventing other employees being poached

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.

REMEDIES FOR A BREACH OF RESTRICTIVE COVENANT

If a restrictive covenant is deemed valid and enforceable, an employer can enforce the restrictive covenant by:

• Applying for an injunction order to enforce the restrictive covenant
• Seeking damages from the employee for loss sustained from the breach of restrictive covenant

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.