Employment law- Restrictive Covenants
It is usual for employers to insert clauses into contracts of employment or directors service agreements which seeks to restrict the conduct of that individual after termination of employment. Whether they are looking to set up on their own or join a competitor, departing employees are likely to have acquired an insight into the employers confidential business operations, thus helping them gain an unfair competitive edge. Restrictive covenants play an important role in protecting an employer’s commercial interests from this threat, and they are widely used in investment banking and client facing roles.
What are the different types of restrictive covenants?
Restrictive covenants mostly fall into the following categories:-
This seeks to prevent you for a set period of time after termination of your employment (usually 6, but sometimes 3 or 12 months) from working for a competitor.
Non-solicitation of clients
The non-poaching restrictive covenants aim to stop you having contact with clients/customers/contacts of your employer, usually for a set period of time after you have left (usually for 3,6 or 12 months for more senior staff). The restrictions can either be in the form of a “non-solicitation”, or “non-dealing” clause – the latter being more onerous as it is a more blanket restriction of dealing with the contacts, rather than limiting it to your actual “soliciting” those contacts for business.
This is the non-poaching of key employees, and is often becomes relevant where there are team moves (especially in banking circles).
How enforceable are they?
The general position is that post-termination restrictive covenants are void on public policy grounds as being in restraint of trade, unless they are being used by the employer to protect a legitimate business interest. Such an interest would include client and customer connections (including prospective ones), confidential information (such as trade secrets) and connections with suppliers. This is not an exhaustive list.
It is wrong, however, to assume that restrictive covenants will not be upheld by the courts. Whether such clauses are actually enforceable will always depend upon the particular factual circumstances of the case. However, the following principles will usually be taken into account:
- Any attempt to deny an ex-employee the right to make a living in their chosen industry or profession is taken very seriously by the court and is unlikely to be enforceable.
- The clause must not be any more restrictive on the employee than is reasonably necessary in the particular circumstances to protect an employer’s business. If the clause is too restrictive then it is likely to be struck out as unenforceable by the courts. For example, if a covenant seeks to restrict your dealing with “all clients” (known as a “non-dealing clause) this may well be too wide and therefore unenforceable. If the clause, however, only seeks to restrict those clients that you have had a “material dealing” with in the 12 months prior to your termination, then this is more likely to be upheld.
- Your employer must be able to show that they have a legitimate business interest which requires protection. They cannot simply seek to restrict an employee competing against them just for the sake of it after they have left. They need to be able to show that an employee’s potential actions could have a detrimental effect on their business.
- What is reasonable will depend upon an employee’s position within the business. For example, it will be more reasonable to seek to restrict the actions of senior employees who are regularly in contact with the customers and contacts of the business than it will be to seek to restrict the actions of a junior member of staff. Even if you do not hold a senior position, restrictive convents are more likely to be upheld where an employer can establish a substantial personal connection with relevant customers, whether or not a decision is made to solicit them.
- If a non-dealing covenant prevents any contact with relevant business contacts it will not be enforceable because the restriction will not be referable to the legitimate business interest to be protected.
How easy is it for an employer to introduce restrictive covenants retrospectively against an employee?
It is far safer for an employer to make sure that the correct restrictive covenants form part of the contract of employment from the outset. If, however, an employer would like to introduce a new restrictive covenant (or amend an existing one) after employment has commenced, it is free to do so provided the employee consents. In the absence of an employee’s consent to the contractual changes, the employer has two options:
1. They can unilaterally impose the change. If the employer forces the change without the employee’s express consent, however, the employee may have a claim for constructive dismissal, in which you are forced to resign. Note, however, that it is possible you can still give implied consent to the change by way of conduct, for example, by not objecting to the change even though you may disagree with it.
2. They can terminate the employee’s employment and offer re-engagement on new terms. This is a dangerous position for an employer as the employee could make a claim for unfair dismissal if the employer was not seen to be acting reasonably.The courts here, have in some instances, come down on the side of the employer where there has been a “legitimate business interest” to protect, but most employers would be reluctant to go down this road unless they had to.
In order for the introduction of the covenants to be legally binding, an employer also needs to provide some “consideration” (in other words some value) to the employee for their agreeing to the new covenants. This could be a pay rise, bonus or other kind of payment- usually a few hundred pounds will suffice. In some cases, the courts have held that simply offering the employee continued employment can amount to adequate consideration.
What other circumstances are there where restrictive covenants may not be enforceable?
A tribunal will not find a restrictive covenant to be enforceable at a later date if it would not have been enforceable in the first place when the contract was entered into. If, for example, an employee is hired at a junior level at which time their employment contract contained too onerous covenants which would not have been enforceable at the time, an employee cannot “grow” into the covenants as they become more senior. The enforceability (or in this case, the non-enforceability) of the covenants will not, therefore, change regardless of any increasing seniority which the employee acquires.
For this reason, employers may require employees to give a fresh acceptance of the old covenant on promotion, or request that they sign a new employment contract containing the new covenants. In addition, there needs to be “consideration” in return for an employee entering into a restrictive covenant. In other words, there needs to be “some real monetary or other benefit”. An offer of employment would be treated as a “benefit” for these purposes.
However, where covenants are being imposed retrospectively, there needs to be some additional benefit, such as a monetary payment, for the covenants to become binding.
If you do have restrictive covenants in your contract, your options post-termination can be severely limited. This could leave you unable to start work with a new employer for the period of time set out in the agreement. This is usually for a 3-6 month period.
You may decide to ignore the restrictions when you leave and go and work for the employer of your choice, and taking your clients and contacts with you. You would, however, run the risk of your old employer issuing legal proceedings against you to enforce the restrictive covenants. They could seek an injunction restraining both you and your new employer from being in breach of the covenants. Such applications are rare, but you should nevertheless think carefully before overtly breaching your covenants otherwise it could be be a costly mistake.