restrictive covenants

What Are Restrictive Covenants?

The term “Restrictive Covenants” is something every employee and employer should understand before signing or producing any contract of employment, respectively.


Well, what are restrictive covenants?

These are the standards the employer uses to set out their expectations within a contract of employment.

There are three main parts to these covenants;

  1. Non-competitive, which restricts a former employee working with another employer or competitor in a similar environment.
  2. Non-Solicitations, this prevents poaching of clients/customers/suppliers of former employees.
  3. Non-dealing, this prevents a former employee from dealing with former clients/customers/suppliers, regardless of which party contacted the other.
  4. Non-poaching prevents an employee from poaching former colleagues.

Restrictive covenants are clauses in the employment contract that prohibits an employee from competing with their ex-employer for a certain period of time, after their employment, or preventing  an ex-employee from soliciting or dealing with clients/customers of the business by using knowledge gained in their former employment with the business.

 

Who can restricted covenants apply to?

Most case law refers to employer/employee relationships for restricted covenants, but they can also apply to other types of employment relationships.

 

Casual Workers

It is not normally appropriate to impose conventional post-termination restrictions on a casual worker, such as a temporary contract or zero hours contract.

This would be based on there being no continuity of employment and no mutuality of obligations, so the casual workers can work for others even during their current employment relationship.

It is likely to be unreasonable to restrict a casual worker, as they tend to be more junior roles with fewer responsibilities or influences with business contacts, and so no legitimate business is being protected by restricting these individuals.

 

Partners and LLP members

Whilst the same rules apply to partners in respect of restrictive covenants, it is accepted that the bargaining power between partners is more equal than between employer and employee.

A partner can  though be subject to implied restriction. More than likely a partner retires from a partnership, being free to set up in competition and to act for client of previous organisations  who approach the previous partner directly.

As well as restrictions you might see an employment contract, a partnership agreement can also impose restrictions to prevent team moves. This prevents a partner upon leaving to join another competitive organisation to which another partner or senior employee from the original organisation has transferred from.

Such previsions have not yet been challenged in court yet!

Non-competition restrictions which prevent a partner from working for another competitor within a defined geographical area, can generally be upheld if the extent of the covenant is reasonable, even if it is for a significant period of time.

 

Consultants

Consultants can build up close relationships with clients of a customer, supplier, and employees of a business they carry out work for.

They also may acquire confidential information which could be used to their advantage in appointments with other clients.

This is rare to impose a non-competition covenant on a consultant (Mainly as this may suggest an employee/employer relationship), other restrictions could be bonding against self- employed consultants.

There is minimal case law on this.

 

Are restrictive covenants in employment contracts legally binding?

We often hear from time to time, from our employees that the covenants an employer imposes are not legally binding, so they just sign and ignore them.

The answer is yes! Restrictive covenants can be legally binding if they are not void for restraint of trade.

Basically this means if they are reasonable regarding the interests of all parties at the time the restriction was entered into. The restriction must be protecting legitimate business interest which it is appropriate to protect, such as client contacts.

Restricted covenants in employment terms have stricter rules and are less likely to be enforceable than, restrictive covenants on the sale of a business, where bargaining powers are more equal as between the parties.

Non-compete clauses are possible, they do need to be carefully drafted, as a restrictive covenant designed only to restrict competition will not be enforceable.

To be enforceable a restrictive covenant must be necessary to protect the employer’s confidential information, trade secrets or client contacts and to prevent a former employee using these for their own or competitor’s unfair advantage.

Providing that the restrictions are above board and are properly incorporated into an employee’s contract or signed written Terms and Conditions, or a signed settlement agreement with additional considerations provided, restricted covenants are enforceable. Albeit that enforcing them in courts can be expensive and time consuming. Restrictive covenants will not be enforceable if they are not clear drafted, and reasonable at the time the parties enter into the covenants.

 

Can Employees Review Them?

Employee’s do have the right to have a legal representative to review their contracts of employment or terms and conditions or signed settlement agreements, which could be timely if they are not deemed reasonable or are too wide.

In court the judge will not sever parts of the clause or rewrite the clause to make it reasonable  and enforceable.

The court will only treat separate promises as severable, and so can delete one clause and apply others, but can’t delete part of a clause to give it the effect the employer would desire at the time of enforcement.

When a court is reviewing a case they must bear in mind that the contract stays the type that was entered into by the parties in the first place and that there is sufficient consideration for the promises made.

Courts very rarely adopt a purpose approach where restrictive covenants are defective, in example of poor drafting which has led to a vague covenant.

 

What can you do if employees breach their post termination obligations?

If you can prove an employee has breached their post termination obligations, then you could be entitled to end their contract without a notice period or payment in lieu of notice.

 

What duties and obligations do employees have towards your business, after termination of employment?

Most employees will be required to return items such as mobile phones or cars that are company property. This will be set out in the contract of employment. However, they do still have some obligations which are: –

  • Fiduciary duties – Directors have fiduciary duties and must act in their former employer’s best interests. More senior employees may also have the same obligation in regards to reporting their own wrongdoing and that of other employees.
  • There is usually an express or implied term in every contract of employment relating to confidentiality. This means that the former employee shall not disclose any confidential agreement to a third party learnt during their employment. It is useful to constantly review this confidentiality clause.

 

What if a former employee breaches a restrictive covenant?

If the restrictive covenant is valid and enforceable there are several options, you have if a former employee breaches said restrictive covenant:

  1. Apply for an interim injunction – if the breach is of a more serious nature, damages are usually seen to be insufficient and, in these cases, an interim injunction may be granted. An injunction will enforce the restrictive covenant.
  2. Seek damages – if financial compensation is sufficient an injunction would not be granted. Where those restrictive covenants are breached, an employer is entitled to apply for injunctive relief to prevent damage from being done to its business. It may also wish to seek damages to compensate it for any loss it has suffered.
  3. Undertakings – An alternative to an interim injunction is for the former employee to agree to provide ‘undertakings’ until the outcome of the trial. This is attractive as if the former employee undertakes to observe the restrictive covenants it avoids the cost of an interim injunction.
  4. Act against a third party – A party seeking to enforce a restrictive covenant against a third party must establish two things: The person enforcing the covenant is entitled to the benefit of the covenant, and the person against whom he is enforcing the covenant is subject to the burden of the covenant.

Do restrictive covenants apply to redundancy and TUPE?

As long as the restrictive covenant is reasonable and enforceable then it will usually run from the employee’s last date of employment. It does not matter what the reason for dismissal was – therefore, a restrictive covenant may still be enforceable if you have been dismissed or been made redundant. There are only very narrow circumstances when a restrictive covenant will not be enforceable following a dismissal.

In relation to TUPE, the conditions are that the employees carry forward their contract of employment and all the same terms and conditions. This means that the restrictive covenants will be carried forward also.

 

PILONS and restrictive covenants?

If the contract states that an employer can terminate the employment and can implement pay in lieu of notice (PILON) then terminating without a notice period is acceptable. Post-termination restrictions remain valid and enforceable.

You will have to pay all contractual benefits, but the restrictive covenants will still remain in place.

 

What happens if the employee resigns?

Apart from if the employee resigns due to constructive dismissal, all restrictive covenants which are enforceable remain.

 

The main point to take away is that as long as the covenants are fair and reasonable they are enforceable, it is also worth noting that you should also be mindful of and keep track of president setting as to not treat an employee less favourably than another resulting in a loss both financially and case.

So the next time you have an employee tell you that their covenants can’t be enforced, be confident if the above has been followed.

If you need help with figuring out your employee or director contracts, give us a call on 0330 400 5940, or contact us via our quick online form.

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