Restrictive Covenants in Employment Contracts

Question

I’ve just been offered a senior role in a company. In the contract I noticed that there were a number of ‘restrictive covenants’. What are these and am I bound by them?

Answer

Paul Cowdery, Partner & Head of Employment, Clarke & Son replies:

A restrictive covenant is typically a clause in an employment contract which will prohibit an employee from competing with his ex-employer for a certain duration of time after he has left the business. Restrictive covenants also typically prevent the ex-employee from ‘soliciting’ or ‘dealing’ with customers of the business by using knowledge and information gained during his employment.

Every business will have information and data which it deems both integral and valuable. An ex-employee who has knowledge relating to systems, information, developments and customers can be attracted by competitors, and it is for this reason that employers need to protect their legitimate business interests. To protect their business, a company will impose post-termination restrictive covenants on an employee by incorporating these into their employment contract.

The extent and ‘width’ of such covenants must be relevant to the employee’s position. For example, a more senior employee will usually be in contact more with ‘sensitive information’. Similarly, a more senior member of staff will usually have more contact with customers while many administrative staff have little or no contact with customers. This is relevant in regard to non-solicitation covenants.

Types of restrictive covenants

  1. Non-Competition covenants – these restrict former employees working in a similar employment for a competitor. These types of covenants tend to be the most onerous as they can severely limit the ability of an individual to make a living for the duration of that covenant’s period.
  2. Non-Solicitation covenants – these prevent the employee from poaching clients and customers from his previous employer. This will also include the poaching of suppliers.
  3. Non-Dealing covenants – these covenants will prevent a former employee from dealing with former clients, customers and suppliers, and this will be applicable regardless of which party approached the other.
  4. Non-Poaching covenants – these prevent an employee from poaching former employees of the business.

Enforceability

Restrictive covenants start off as being unenforceable unless they can be justified as reasonable and appropriate by the business seeking to rely on their protection.  A covenant which is wider than reasonably necessary to protect the legitimate business interests of the business is at risk of being unenforceable.

The length of the covenant will be relevant. While a shorter covenant will benefit the employee, a longer duration will usually be desired by the business in order to protect the interests of the business for longer.

It is usual for restrictive covenants to apply for between 6-12 months post termination. Covenants at the longer end of this scale are only likely to be reasonable for senior employees.

The breadth of the geographical area of a restriction may also be relevant to enforceability but territory specific covenants may be inappropriate for many companies as the nature of the business may not be defined by geography, as some business competition can take place from any location.

This is a complex area and when you are negotiating terms you should consider these provisions very carefully.   They could affect your ability to find a new job if the current opportunity does not work out as you would hope.

If you have a query or would like to book an appointment please get in touch with our First Contact team on 01256 320555 or email mail@clarkeandson.co.uk