What are restrictive covenants and how could they help or hinder your business? Jennifer Smith, who is a Partner at Forbes Solicitors LLP and leads their Manchester Employment and HR Team, explains what a restrictive covenant is and the legal pitfalls employers should avoid in using them.
What is a restrictive covenant?
Restrictive covenants (also known as post-termination restrictions) aim to protect an employer’s legitimate business interests and place boundaries on what an ex-employee can/cannot do after their employment has ended.
Such covenants are usually applicable for senior staff within the business and are found in an employment contract or a separate agreement altogether (in addition to issuing the employment contract).
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The benefits of having restrictive covenants in employment contracts
While during employment, an employee is bound by implied terms (such as the duty of fidelity), including restrictive covenants in an employment contract – or a separate agreement – protects the commercial interests of an employer from being exploited for a certain period post-termination, following an employee’s departure.
Legitimate business interests may include:
- Protecting the employer’s relationships with clients/customers;
- Maintaining good supplier relations; and
- Preserving the stability of its workforce
It also serves to act as a deterrent for any departing employee intending to take advantage of the employer’s established trade connections.
Are there disadvantages to having restrictive covenants?
It can be very difficult to enforce restrictive covenants from an employer perspective. By default, post-termination restrictive covenants are void and unenforceable unless they go no further than is necessary, in order to protect an employer’s commercial interest.
In the event of a dispute, the Court would look at what is fair in the circumstances and the burden of proof will be on the employer to prove that the restrictions were reasonably necessary and justified. If the restrictions are deemed unfair/unreasonable, they will be void and unenforceable. It is therefore vital that the restrictions are reasonable and not too wide and/or onerous in scope.
It is important to be aware that the restrictions would be assessed at the time that they were entered into (not when the individual has left) and whether they were reasonably necessary to protect the employer’s legitimate business interests.
Therefore, while restrictive covenants can be a highly useful tool for an employer, lack of consideration and/or poor drafting may render the covenant(s) futile in terms of enforceability and may lead to huge commercial risks and repercussions for an employer.
Types of restrictive covenants
There are a few different types of restrictive covenants, including:
A clause is included in the employment contract (or separate agreement) to cover circumstances where the departing employee does not entice, tempt, or persuade a customer or client of the company to leave, in order to obtain their business.
Whether or not the ex-employee has solicited is a question of fact and degree and the ex-employee does not necessarily need to initiate contact for the Court to come to this conclusion.
This is a clause to prevent the ex-employee from soliciting any existing staff from the company and ensures the stability of a company’s workforce.
A non-compete clause stops an employee from joining a competitor for a certain period (deemed as "the most powerful weapon in an employer's armoury" - Patsystems Holdings Ltd v Neilly ).
A clause (somewhat similar to non-solicitation as outlined above) which prevents an ex-employee from dealing with clients or customers. However, it does not matter here who made first contact with whom, so it is broader in scope. The benefit of this clause is that this stops an ex-employee from doing any form of business with the clients/customers of the ex-employer. Any such enforcement of this clause will very much hinge on what interest is sought to be protected.
A restriction which will inhibit the departing employee from performing certain activities in a specified area, locality, or region.
Tips on restrictive covenants
- Consider whether restrictive covenants are appropriate in each individual circumstance; identify the legitimate business interest the restrictive covenant is intending to protect and tailor any restrictions to the individual (as appropriate). Having standard/blanket restrictions across the board will almost certainly bring the restrictions into question!
- Periodically review whether restrictive covenants remain reasonable. For instance, if an individual is promoted within the business, an employer should consider whether the restrictions are still appropriate in the circumstances, or will it need to enter into a new agreement with the promoted employee?
- Allow opportunity for the employee to obtain independent legal advice on the restrictions before the contract of employment or separate agreement is signed. This will help show that the employee was not coerced into signing the contract or agreement and, in effect, made an informed decision.
It is imperative that an employer identifies their legitimate commercial aims and objectives from the outset and considers how to reasonably protect them. Given restrictive covenants can be a double-edged sword (if poorly drafted and not properly considered) and in view of the fact that any legal dispute will inevitably be very costly and time consuming, it is vital that employers obtain legal advice before entering into any restrictive covenants with employees.
Ensure restrictive covenants are properly drafted to reasonably protect an employer’s commercial interests and ensure that the restrictions are always tailored to the individual’s role and seniority within the business.
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Written by Jennifer Smith
Jennifer Smith is a Partner at Forbes Solicitors LLP, leading the Employment and HR Team for their Manchester office. She deals with all aspects of employment law, advising and assisting private sector clients, from local SMEs to large multinational companies. Jennifer has particular expertise in the digital and e-commerce sectors, as well as the hospitality and retail sectors.