What Are Restrictive Covenants?
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Departing employees can take advantage of confidential information, strategic plans, customer and client details or other information about the company after the termination of their employment. They may attempt to use this information to benefit their new employer or set up a rival business, seriously harming their former employer. To combat this risk, most employers include restrictive covenants in their employment contracts.
However, an employer cannot impose a covenant simply on account of not wanting an ex-employee as a competitor. They can only seek to prevent the individual from using or damaging something that legitimately belongs to them. To determine what rights may require protection, the employer must look at the nature of their business and the employee’s position within it. Information that falls into the following categories can be protected by law:
- Trade connections and goodwill with customers, clients or suppliers
- Trade secrets and other confidential information.
- Stability of the workforce.
Different Types Of Restrictive Covenants
There are a few typical types of covenants used in employment contracts which apply to different practices:
This covenant prevents former employees from revealing confidential information about their previous employer.
Solicitation occurs when past employees encourage their former employer’s clients to move away. A covenant can prohibit this.
This restriction prevents an ex-employee from working with a client in a competing capacity. It can include prospective customers.
This restraint prohibits ex-employees from approaching their former colleagues and persuading them to join a new company.
Non-employment covenants prevent a former employee from being involved in recruiting other employees from their previous employer.
This final covenant prevents former employees from taking up a new role which competes in any way with their old employer. Non-compete covenants are the broadest and most effective restrictions but are often the hardest to enforce.
These different covenants generally apply to clients or colleagues with whom the ex-employee had recently meaningful contact in the last six to twelve months of their employment. If they did not contact a client or colleague, the covenant is unreasonable.
Can You Get Out Of A Restrictive Covenant?
Post-termination restraints are only enforceable if they are reasonable regarding the interests of the parties and the public. That means the restriction must be no broader than necessary to protect the employer’s legitimate interests.
Garden leave is also used in conjunction with or as an alternative to restrictive covenants. It prevents the employee from taking up their new position with a competitor for a specified period, during which the employee loses sight of any current confidential information and their successor can establish a relationship with existing customers. Garden leave must be agreed upon in the employment contract and is only enforceable if it is reasonable.
Are My Covenants Enforceable?
Given the parameters posed by the reasonableness test, covenants are easily composed incorrectly. Expert drafting is required to ensure restrictions are not viewed as restraints of trade. Each business is different, but you should consider:
- The specific business interest you are seeking to protect
- The duration of the restricted period
- The type of information that is confidential
- The suitability of the restraints in relation to each employee’s role
How Can An Employer Seek To Enforce Restrictive Covenants?
An employer seeking to enforce restrictive covenants can apply to the High Court and ask for an interim injunction so that the court orders the ex-employee to comply with the restriction. Unless it is an emergency, the employer should ask the ex-employee to abide by the covenant before making the court application.
Employers may also seek damages for lost profits due to the breach of the covenant. As many employees would not have the funds to compensate for these losses, former employers will often try to sue the new employer as well for inciting a breach of contract.
To avoid this situation, suitable employment contracts should be drafted with appropriate non-competition and non-solicitation clauses and possibly a garden leave clause.
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All advice is correct at time of publication.