Restrictive Covenants: Mistakes not to make

Restrictive Covenants employment law HR
Don't be too restrictive in your contracts

Properly drafted restrictions protect an employer’s business relationships and confidential information so don’t overlook them, says Melanie Stancliffe, Employment Partner at Irwin Mitchell LLP.

Many employers miss important protections for their businesses by assuming that these restrictions are not worthwhile.  That’s a costly mistake because inserting the restrictions in the initial contract does not add any additional cost and provides protection and a strong deterrent against disrupting the former employer’s business relationships.

During the employment, an employee is under the duties in their contract and implied duties like fidelity and trust and confidence.  They would breach these duties if they solicited away a client or encouraged a colleague to leave their employment. After the employment ends, however, there are no implied terms so the only restrictions on an employee are those written in to the contract.

Restrictive covenants are a flexible vehicle that can prevent ex-employees from soliciting away customers, clients, suppliers, other employees or even competing with their employer, for a limited period of time. The English courts recognise that businesses need to protect their confidential information, their client base, the stability of their workforce and the goodwill in their businesses.  They will order former employees to stick by the bargain they entered in to and/or to pay financial compensation if they don’t.

Overreaching such as preventing any work

The desire for maximum protection can lead to restrictions which prevent an employee from earning their living for two, three or five years, anywhere in the world.  The English courts often find that employers have over-reached themselves and release even senior employees to work in a competitive business where the restrictions have been drafted too widely.

To be a valid restriction, the employer must:-

have legitimate business interest to protect; and

extend no wider than reasonably necessary to protect that interest.

In the 2017 Court of Appeal decision Tillman v Egon Zehnder Limited a senior executive search consultant escaped a restriction on her competing.

Ms Tillman had worked in London.  She resigned and intended to join a competitor in New York.  The restriction prevented Mrs Tillman for six months from the Termination Date from:-

“directly or indirectly engaged or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of 12 months prior to that date and with which you were materially concerned during such period.”

It was important for her ex-employer to stop her competing to re-establish its connection with the clients she had dealt with.  The court found that the global restriction was reasonable because it was limited to where Mrs Tillman had “materially” worked.

However, the shockwaves then hit.  The court found the restriction unreasonably wide because it precluded her from having any involvement in a competitive business, even as a minority shareholder.   The court did not re-write the clause to what is “reasonable”.  The whole restriction was struck out giving the employee a “get out of jail free card”.

The lesson for employers is to review the non-competition restrictions in their contracts.  They should ensure key employees will be allowed to hold shares in quoted companies (say five per cent) to avoid the restrictions being nullified.

Ensure changes are accepted

Obtaining a signed copy of the contract which includes the restrictions is essential.  For an employee starting employment this is rarely a problem. However when an employee is promoted, employers must re-consider the protections needed and make sure the employee have read and accepted those changes.  If an employee refuses to sign or objects, then they have not agreed to the new contract or restrictions.

In the 2015 case of Re-Use Collections Ltd v Sendall, an employer was unable to hold Mr Sendall to the restrictive covenants included in the new contract of employment presented to him.  Mr Sendall, an existing manager in the business, did not sign the contract but had received some new benefits which appeared in it.

The High Court was found the contract was not binding because Mr Sendall had not received any “consideration” for the changes.  He had received a pay rise and bonus around the same time but the rise was not specific to him nor was it conditional upon him accepting the new restrictions.

The employer also argued that Mr Sendall benefitted from his continued employment.  The court disagreed.  Continued employment was not “consideration” because the employer had wanted to employ Mr Sendall and had not suggested his position was at risk if he declined the new contract.

Properly drafted restrictions protect an employer’s business relationships and confidential information.  Ex-employers can prevent an employee from starting their new role, transferring a client base, accepting competitive orders and even bringing a team to work with them.  This gives them time to solidify relationships. Many employees will accept the restrictions and comply with them.  Some will even decline new roles because the restrictions they see in black and white may be breached and they want to leave on good terms.

For those employees who contest restrictions, it is more important the restrictions are reasonably narrow and the valid acceptance is documented.  The courts will hold employees to the restrictions they accepted at the outset or when they moved up.  The above cases are the exceptions that prove the rule that employers can be compensated for infringements.  Getting it right takes effort but avoiding these mistakes is possible to ensure their business is protected.


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