Restrictive Covenants

Departing employees are often well-placed to take advantage of an employer’s confidential information and customer connections after the termination of their employment and may attempt to use this information and their business contacts for the benefit of their new employer or in order to set up a rival business.

What is a restrictive covenant?

Whilst found in property law, a restrictive covenant can also be found in business as well. In employment law, restrictive covenants are contract terms that limit an employees ability to compete against your own business following termination or departure of the company. An example of a restrictive covenant would be a no-compete clause which can protect your business for a period of time.

Employers are entitled to protect their legitimate business interests through the use of restrictive covenants.  However, any restrictive covenant which restricts an employee’s activities after termination will be void for being in restraint of trade and contrary to public policy unless the employer can show that:

• It has a legitimate proprietary interest that is appropriate to protect.
• The protection sought is no more than is reasonable.

In general terms, restrictive covenants will only be enforceable if:

1. They are reasonable.
2. They protect a legitimate interest of the employer, e.g. its trade connections with customers or suppliers, or confidential information or maintaining its workforce stability.
3. The covenants do not prevent competition per se. Restrictive covenants that have the sole aim of preventing competition will not be enforceable.
4. The restrictions must be no wider than necessary. The restrictive covenant must go no further than is necessary to protect the employer’s legitimate business interests, e.g. by being limited in time.

Whilst restrictive covenants are sometimes seen as being difficult for an employer to enforce, a well-drafted and properly thought out set of restrictive covenants will be enforceable.  The worth of an enforceable set of restrictive covenants can be invaluable to an employer, even to the extent that they may make the difference between the business succeeding or failing.  For employees, the consequences of breaching a restrictive covenant can include being made subject to an injunction preventing them from competing for a period of time and being ordered to pay damages to their former employer.

We have extensive knowledge of the law and practicalities that apply to restrictive covenants and regularly draft restrictive covenants for inclusion in contracts of employment and advise clients upon their enforceability.