Business, Employment Law

Restrictive Covenants: The most important set of clauses in a contract of employment?

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Every business has information that it considers both integral and invaluable to its success. Often, businesses will want to protect this information and restrict the use of it by employees after their employment has ended. Ex-employees with knowledge of a business’ customer base or pricing list for example, may be an attractive asset to a competitor and may have little loyalty to their former employer, therefore being all too willing to divulge commercial secrets(!)
In order to protect and prevent the use of this kind of sensitive information by ex-employees after the employment relationship has ended, an employer needs to have contractual restrictive covenants in place. In order to be enforceable, restrictive covenants need to actually be written into an employee’s contract, that is, they need to be express terms of contract. Restrictive covenants cannot be assumed or, implied.
A restrictive covenant then, is typically a contractual clause which prohibits an employee from competing with his ex-employer for a certain period after the employee has left the business or which prevents the ex-employee from soliciting or dealing with customers of the business by using knowledge of those customers gained during his prior employment. Although employers are entitled to include these types of clauses within their employees’ contracts, restrictive covenants are actually unlawful on grounds that they are a restraint of trade and contrary to public policy. That said, if the employer can convince a court that a covenant is:

  • designed to protect his legitimate business interests; and
  • that it extends no further than is reasonably necessary to protect those interests

then it will probably be upheld and enforced.
In practice, it can be difficult to demonstrate that a restrictive covenant is indeed enforceable and employers need to pay careful attention to how they draft any such clauses. Restrictive covenants must not be drafted too widely and they must be relative to the employee’s position within the business. Generally speaking, an employer’s more senior employees will be in contact with more sensitive information and restrictions placed upon them may be justified as being more onerous. Applying the same restrictions to less senior staff then with less access to sensitive business information might not be considered acceptable. Overall, a one-size fits-all policy on restrictive covenant clauses risks any such clauses becoming unenforceable and is not advised.
Ultimately, it is for the employer in the event of a clause being challenged to show that the clause is justified and sufficiently narrow. When drafting restrictive covenants then, the following should be borne in mind:

  • The fact that the length of time of the restriction must be justified. As a general rule, a restriction for more than 6-12 months will be difficult to justify even in the cases of a businesses’ most senior employees.
  • The breadth of the activities which are being restricted. The restricted activities must be relevant to the legitimate business interest that the employer is trying to protect.
  • The type of interest being protected. The clause must make specific reference to the type of interest being protected but the also, the employer should also consider how much protection a certain interest attracts. For example, pricing lists might be given more protection than customer information, given that pricing lists might have a wider and more damaging use especially when in the hands of potential competitors.

As well as ensuring that restrictive covenants are adequately drafted at the time the contract is entered into, restrictive covenants should also be reviewed periodically in order to maintain their enforceability as the reasonableness of the covenant is judged at the time it was entered into and not at the time the covenant is being enforced. If therefore, employees are given promotions then you might want to consider whether their restrictive covenants need revising in any way. That aside, reviewing all covenants annually would be advisable.
If you would like to learn more about restrictive covenants or, if you would like us to review any restrictive covenants that you might have in place with your employees then please do not hesitate to contact a member of our Employment Law team on 01274 864999.

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