Hi here is a note on restrictive covenants as promised:
It is common for employment contracts to contain post-termination restrictive covenants, which restrict the employee’s activities once their employment terminates. An employer would understandably want to protect their business from a departing employee's knowledge of confidential information, business connections, influence over clients, suppliers, staff, etc. However, a covenant that restricts an employee's post-termination activities will be automatically unenforceable by being in restraint of trade, unless the employer can show that it was there to protect a legitimate business interest and did so in a reasonable way.
The first thing to consider is what legitimate business interests (LBIs) can the employer try and protect? The most common ones are:
- Goodwill (trade connections with customers and suppliers)
- Trade secrets and confidential information
- Stability of the workforce (preventing poaching of employees)
If they are trying to protect an LBI, any relevant restriction must be drafted no wider than is reasonably necessary to protect that interest. Generally, the courts would try and balance the interests of the employer's business and the employee’s right to freedom of movement and earning a living.
Non-solicitation covenants are used to prevent an employee from enticing away their ex-employer’s clients. Solicitation generally requires a direct and specific appeal to a client to encourage them to transfer their business; and a personal connection to be able to influence such a move in the first place. There has to be a positive act by the employee such as to "tempt, lure or persuade” the client to do business with them. Ideally, the restriction should be limited to specific customers with whom the employee had contact during a specified period before leaving, or with which they enjoy a close business relationship. If the employee initially brought the clients to the employer when they started working there will not in itself stop a non-solicitation covenant from applying, although it may be a factor relevant to the length of the restriction. Also, if a client no longer wants to do business with the former employer, that will not be relevant in deciding whether or not to uphold the restriction.
Non-competition covenants prevent an employee from working with a competing business or setting up to work in competition with their ex-employer. A covenant simply wishing to prevent competition will not be enforceable, especially as competition is generally seen as healthy for consumer rights. However, a non-competition covenant trying to protect an LBI can be. Such covenants will generally only be reasonable if in the process of working in competition, the employee uses trade secrets or sensitive confidential information belonging to their ex-employer, or their influence over clients is so great that such a restriction is necessary. The duration of the restriction can be important, with 6 months usually seen as the maximum in standard situations and anything longer can be seen as unreasonable.
Restrictive covenants are often used as a scare tactic by employers, hoping that an ex-employee will simply not attempt to breach them in order to avoid potential legal trouble. However, if the restrictions are allegedly breached, the employer has the right to take the matter further. The following legal remedies are available to them:
- Injunction – an order of the court to stop the ex-employee from doing certain things that would make them in breach of the restrictive covenants, such as not to contact certain clients, not to use certain confidential information or not to work for a specific competitor. It can also instruct them to deliver up certain confidential information, which they may have tried to use
- Damages - compensation for loses which have directly resulted from the breach of the covenants, although it would only be possible if such losses are identifiable. This will normally include loss of profits on contracts or opportunities, which have diverted by the employee. It is potentially also possible to make a claim against the ex-employee’s new employer, if they had knowingly or intentionally induced the employee to breach their covenants
In summary, there are various factors which deal with the reasonableness and enforceability of restrictive covenants. Whether a specific restriction is enforceable will always depend on the individual circumstances, the interest being protected and whether it has been reasonably drafted. In the end, only a court can decide if a covenant is legally enforceable, so unless the employer goes to court and succeeds, they will only be able to rely on the employee’s own compliance with the restrictions.