Dos and Don’ts of Restrictive Covenants in employment contracts

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employment solicitor Beverley Sunderland - Crossland Solicitors
Beverley Sunderland

Restrictive covenants in employment contracts can prevent an employee from competing with an ex-employer after they have left a business, or stop an ex-employee from soliciting or  dealing with previous customers that they dealt with during their previous employment.

It is myth that restrictive covenants are generally unenforceable, but they do need to be carefully drafted. Here we explore some of the Dos and Don’ts of these clauses in employment contracts.

Do:

  1. Ensure that when an employee joins an organisation the type and length of the restrictive covenants are considered for the particular employee, in the context of the job they are doing and in the industry you operate in. Remember that a restrictive covenant will be enforceable if a court is convinced that a business has a legitimate business interest to protect and that the restriction goes no further than is necessary to do this.

For example, the insurance broking industry is about the only industry that can get away with a non-solicitation/non-dealing covenants for twelve months because insurance policies are renewed annually. This is likely to be much too long for most other industries where the test is how long it will take another employee to develop that customer relationship. This in turn will be driven by how often they interact with the customer – if it is weekly then the period is likely to be much shorter than if they speak around twice a year.

When considering if a restrictive covenant is enforceable a court will always consider this as at the time the employee joins the business. If an employee joins at a junior level and has a wholly unreasonable restrictive covenant imposed on them but works his/her way up the organisation to a position where the covenant is now reasonable, the covenant will still be unenforceable because it will be considered in the context of the job the employer was originally employed to do.

Look at their specific job, whether they have customer contact (non-solicitation/non-dealing), whether they have knowledge of confidential plans to expand or pricing information (non-compete). Do they have influence over other employees, or operate as part of a team in circumstances where there would be a real risk if everyone left? (Non-solicitation of employees). How long will it take for someone else to develop a relationship with the client? The answer to these questions will determine what goes into restrictive covenants and for how long.

 

  1. Make sure restrictive covenants are regularly updated – when an employee is promoted or they change job, ensure that the covenants will still protect the business. So if they move from HR to sales, then non-solicitation and non-dealing covenants need to go into the contract. To be enforceable there should always be ‘consideration’ for the employee entering into a restrictive covenant – this can be money or money’s worth and so any new restriction can be ‘in consideration’ of the new job.

 

  1. Ensure that you enforce any breaches of restrictions, both for your ex-employees and those joining you. Make it clear, in writing, to new employees who are under covenant from their previous employer, that they must not breach these restrictions. This will help you to defend any claim against you that you have induced a breach of these restrictions. Similarly, if your former employees breach their restrictions, make sure you take action immediately because otherwise your failure to enforce restrictions will be used against you.

Don’t

  1. Assume that a non-compete clause preventing an ex-employee from competing with your business is unenforceable. They can be enforced but only against those employees who have confidential information about i.e future plans for the business, trade connections or other confidential information which, if it gets into the hands of an employer, could give them a real competitive edge. It cannot be used to protect customer relationships, the courts expect non-solicitation and non-dealing clauses to be used for this. The exception is a ‘radius’ covenant (i.e don’t work within two miles of the office) and even then you have to be able to show that there is a correspondence between the ‘radius’ and the client base. While hairdressers and butchers might be able to show this, in today’s technological age often solicitors and accountants, who traditionally used to use this kind of ‘radius’ covenant, can have clients all over the country.

 

  1. Impose identical covenants in the contracts of all employees from the receptionist to the Managing Director. If you do, then you run the risk of them not being enforceable at all because it is clear you have not considered the legitimate business interest that you are trying to protect.

 

  1. Ignore a letter from a new employee’s employer alleging a breach of their restrictions. Speak to the employee immediately and make it clear that this is unacceptable behaviour and that they must stop. Confirm this in writing. If you do this then you will not be liable for inducing a breach but the new employee would still be liable to their former employer.

 

  1. Don’t forget that any clever attempts to get around restrictive covenants will generally be uncovered during a court case. The tentacles of disclosure are very long and can extend to personal texts, emails and indeed those of family members. The potential risks are high, with the losing party having to pay the other side’s significant legal costs, as well as any damages.
Beverley Sunderlandhttp://www.crosslandsolicitors.com/
Director of Crossland Employment Solicitors, Beverley is an experienced employment lawyer based in Abingdon, Oxon.

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5 COMMENTS

  1. Hi,

    I am after some advice. I have been with my company 7 years, I started as an engineer. I signed my contract in 2010 and I have since found there is a covenant in there which does not allow me to apply/get a job with our customer. since my initial contract I have been promoted twice and have not signed any new contracts. I am being threatened with Legal action as my company are claiming there will be a loss of income with me moving. My current role as a Project Manager has only been for 1 month and I am currently on probation period, I have found a job with customer and have since handed my notice in with a view to pursue.
    My question is, how enforceable are the covenants in place?

  2. As a general principle there should be freedom to choose where you work, and only if your employer has a legitimate business interest to protect can they consider imposing restrictions on that, these will be construed as at the time you first signed the contract, not as it applies to the role you are doing now. These are usually protecting confidential information that you might have which is not in the public domain and which might harm them if you went to a competitor. However, here they are attempting to protect their income stream which might possibly be a legitimate aim but the provisions should got no further than are reasonable or necessary and it would be necessary to see your contract and the actual wording. Normally businesses deal with this kind of situation by putting a penalty in for customers – so if they take you they pay a sum to represent your employer’s loss so check if one of those exists. Also, if they are still going to be customers going forward, then they have bargaining power with your current employer – let us have him and keep the rest of the work or risk losing all of it.

  3. Hi there, i was employed as a BUYER in a retail wholesaler which has depots in Midlands, i have only stayed six weeks and left, now I am being offered a job by a nationwide retail company in one of their depots as a Branch Manager , completely different role, with my previous employer it was dealing with suppliers and this role is to manage a depot operation in a far away location to my previous employers depots, would my covenants be still enforcable?

  4. Hello, I have been working for a Cleaning company as a Cleaner going to other people’s homes. I work about 15 hours per week and my Employer does not pay me any Mileage from Client to Client. We are issued with Polo Shorts with the company Logo but I bought a T Shirt that is thinner and exactly the same colour. I went in to the office wearing the T – Shirt and was told by the owner that I could work with the T – Shirt on but he would not pay me. I have to work in old people’s houses and they have the heating on even in the Summer and I find it unbearable wearing the Polo Shirt. I offered to pay for a Logo on my T -Shirt and he said no. Wearing a Polo shirt is not mentioned in my contract. Eventually I got very upset and left the job, I couldn’t stand it any more, having to pay the Mileage I only make about £6 per hour. My problem is that my Clients keep contacting me asking me to clean for them but I have a contract (Not signed by him) that I cannot work for any rival or set myself up as a Cleaner in the area for 2 years. Many of my old clients do not want to change. I think this is unreasonable, I have not pursued there business, they have contacted me as they no longer want the companies services. I think it must be a no association contract because it says I must not pursue them or even work for them. He breaks many rules such as no COSSH training for me, he uses Spray Bleach, I have not had any Health and Safety training Etc. I cannot afford to pay for a Solicitor and have contacted Citizens Advice with no help. I don’t know what to do. Could you offer some advice please? Thank you.

  5. Hi , I work in the pest control industry. I have been offered a job in the same industry but in a completely different area from where i work but my current employer has a clause in the contract, saying I cannot work for another pest control company for 12 months after leaving. As this is my trade, this is preventing me from doing the job I am qualified to do. Can this be enforced ? and how high could my costs be if he won ? Kind Regards Mark .

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