Restrictive Covenants

Departing employees are often well-placed to take advantage of confidential information, strategic plans, customer and client details or other information about their employer’s business, after the termination of their employment. They may attempt to use this information for the benefit of their new employer, or in order to set up a rival business. This can seriously harm the former employer’s business. That is why most employers include restrictive covenants in the employment contracts of their senior employees.

However, an employer cannot impose a covenant simply because it does not want an ex-employee to compete with it. It can only seek to prevent the individual from using or damaging something that legitimately belongs to it. To determine what rights may require protection, the employer must look at the nature of its business and the employee’s position in the business. In broad terms, the rights that a court will allow to be protected fall into the following categories:

• Trade connections (with customers, clients or suppliers) and, more generally, goodwill.
• Trade secrets and other confidential information.
• Stability of the workforce.

Can you get out of a restrictive covenant?

Post-termination restraints are enforceable only if they are reasonable, having regard to the interests of the parties and the public interest. That means the restriction must be no wider than it needs to be to protect the legitimate interests of the employer.

Garden Leave is also used in conjunction with or as an alternative to restrictive covenants as 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 has the space to establish a relationship with existing customers. Similarly to restrictive covenants, garden leave needs to be expressly agreed in the employment contract and its enforceability is subject to a reasonableness test.

Are my restrictive covenants enforceable?

Given the challenges posed by the reasonableness test, it is easy to get things wrong and find that the restraints of trade that are drafted too widely won’t do the job. Expert drafting is required to ensure restrictive covenants in employment contracts are not viewed as being in restraint of trade. Contact us for advice on what should be included in your employment  contracts.

Each business is different, but consideration should be sought on:

• The specific business interest you are seeking to protect
• Duration of 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 restriction. Unless it is an absolute emergency the employer should first ask the ex-employee for an undertaking to comply with the restriction before making the court application.

Employers may also seek damages on account of lost profits due to the breach of the covenant. Because many employees would not have the funds themselves to compensate for lost profits employers will often try sue the new employer as well; for example for inciting a breach of contract.

In order to best avoid for this situation, suitable employment contracts should be drafted with appropriate non-competition and non-solicitation clauses and possibly a gardening leave clause.

How to make contact

For further information on restrictive covenants and restraints of trade from an employer or employee perspective, please call us or email us.