What is the purpose of restrictive covenant clauses?
These clauses offer important protection for a company’s business interests, in the event that an employee leaves. It is useful for business owners, directors and human resources professionals to understand how such clauses work, the interests which they are designed to protect and the legal framework within which they operate.
What Are Restrictive Covenants?
Restrictive covenants are contractual clauses designed to protect a company’s legitimate business interests after an employee leaves. They are most commonly found in employment contracts but can also appear in other documents, such as shareholder agreements.
The aim? To prevent former employees from taking actions which could harm the business, such as joining a competitor, soliciting clients, or poaching employees.
Restrictive covenants tend to operate alongside confidentiality clauses, which also seek to protect commercially sensitive information.
Key Types Of Restrictive Covenants
The most common types of restrictive covenant clauses are:
- Non-Compete: which are designed to prevent an ex-employee working for a competitor or starting a competing business often in a specific geographic area for a period of time, typically 3 to 12 months.
- Non-Solicitation: seek to restrict departing employees from soliciting clients and thereby protecting client relationships for the protected period.
- Non-Dealing: aim to prevent leavers dealing with clients, suppliers or other key business contacts for a time.
- Non-Poaching: seek to stop leavers recruiting former colleagues or encouraging them to join a new employer, for a designated period following the end of their employment.
Are Restrictive Covenants Enforceable?
This is a question that we are asked time and time again.
In general terms (although never a hard and fast rule as only the courts can decide), restrictive covenants are only enforceable provided that they go no further than is absolutely necessary to protect the employer’s legitimate business interests. This is a difficult balance since the Courts have to consider the need for businesses to protect their legitimate interests, with the employee’s need to earn a living.
Non-compete clauses tend to be the most difficult to enforce but this varies depending on the circumstances of each situation.
Remedies
Restrictive covenants can be an extremely useful tool, because as well as the option of seeking damages from those in breach, businesses can also ask the Court for Injunctive Relief, in taking emergency steps to safeguard the company’s interests. Injunctive relief can be more useful to companies who would rather prevent or limit the damage in the first place, than simply pursuing compensation after the damage is done.
Restrictive Covenant litigation usually takes place in the High Court. Emergency injunction applications can be incredibly expensive (tens of thousands of pounds) and so, litigation is often seen as a last resort. In our experience most disputes settle, with the employee agreeing to provide detailed undertakings, for example to refrain from further breaches and to return any stolen information etc.
Is it important to include Restrictive Covenants in Employment Contracts?
It is when there is a risk that an exiting employee might take steps directly or indirectly which could damage an ex-employer’s business interests. These types of clauses are then a useful tool to protect the business. The protection they can offer is particularly important where senior employees are concerned, particularly for those whose roles mean that they develop key relationships with clients, suppliers and stakeholders or have access to important commercially sensitive information.
Generic clauses which apply to all employees, tend to be problematic because what is considered reasonable and therefore, enforceable, tends to vary from one role to another.
Be specific
The devil is in the detail. Whilst a well drafted clause can be a very effective deterrent, offer the potential of a lever in negotiation, and a remedy when things go awry; a poorly drafted one will offer a lot less protection and indeed, ultimately may not even be enforceable.
Bespoke drafting is the key
To ensure that restrictive covenants have the effect of protecting business interests, it is essential that they are drafted with the specific business in mind and the areas of the business that need protecting, whether that is the product or clients, prospective customers or key employees.
For further advice on restrictive covenants contact a member of our employment team on info@osbornewise.com