What are Restrictive Covenants?
Generally restrictive covenants, sometimes referred to as ‘post termination restrictions’ are set out within Contracts of Employment or Settlement Agreements by employers with a view to preventing or limiting employees from doing something after they leave.
Employers will often seek to prevent departing employees from working in the same industry or in direct competition and dissuade them from contacting clients of the business. This will often be for a period of time after they leave which can be anything from weeks or a month to 18 months or occasionally up to two years.
Potential Pitfalls for Employers Seeking to Enforce Restrictive Covenants
- Generally businesses will draft the restrictions far too wide which significantly reduces the likelihood of enforceability.
- Some Judges are averse to enforcing restrictive covenants, in particular where they have not been narrowed down or made more specific.
- Businesses should ensure that they do not lose sight of precisely what they are seeking to achieve and what the specific risks are to the business if these restrictions are not in place.
Therefore, businesses need to ensure that Restrictive Covenants are clearly set out and kept as narrow as necessary in order to protect genuine business interests. They are not intended to be a blanket ban for departing employees to obtain further employment or earn an income. Courts will often seek to achieve a balance between the likely damage to the Company if the Restrictive Covenants were not in place or were breached and the damage to the departing employee if the Restrictive Covenants are in place, for example, whether this makes it too difficult for them to be able to gain further employment or earn an income.
Drafting Watertight Restrictive Covenants
The Courts have laid out a three stage test when considering the enforceability or likely enforceability of Restrictive Covenants which can be used by employers when drafting the same and employees when considering whether to accept the same.
The test being that:
1. Whether the person seeking to enforce the restraint has a legitimate business interest to protect:
- These should not be ‘blanket bans’. For example stating that the employee may not work for a direct or similar competitor. They must be tailored more specifically and in light of the employee’s specific role within the Company.
- Whether the restrictions are needed to protect confidential information that may damage the business if left in the wrong hands taking into account the employees’ specific role within the Company.
2. Whether the restraint is reasonable in the public interest:
- Although this rarely occurs in restrictions, it has been argued that certain restrictive covenants are unreasonable and should not be enforced because they are against the public interest. One example is where a restrictive covenant would restrict the development of inventions in medical science that would benefit the public, it was only in such exceptional cases that such restrictive covenants on these grounds may be unenforceable.
- This issue rarely arises unless for example it involves a doctor or lawyer where there may be an exceptional case in regards to the enforceability of the restriction.
3. Whether the restraint is reasonable as between the parties:
- As a general rule a 12 month restriction is the maximum length an employer will ever be able to justify. Furthermore, the shorter the restriction the more likely it is to be considered enforceable.
- In ensuring it is reasonable a business and employee will want to make sure that a notice period is proportionate to the length of the restriction. For example, an employee with 1 week’s notice period with a 12 months restriction placed on him preventing him from working for competitors is likely to be able to argue this is unreasonable and therefore unenforceable. This is because the employee could put forward an argument as to how he would be able to support him/herself for such a long period on 1 weeks’ notice pay. This will be a matter for the Court or Tribunal’s discretion.
- Another consideration is that an employee has to actually work to maintain their skills and thus not become unemployable, such as Media Analysts or Bankers (to name but a few). In these cases, a direct ban is less likely to be enforceable. However a restriction on working for a particular competitor or area (for example one that has been narrowed down and made more specific) is more likely to be enforceable.
- The key is to balance the practical needs of a person to be employed to support themselves against the need of a business to protect its own business.
In summary, restrictive covenants need to be very narrowly written taking into account the circumstances of the employee to which they will be applied, to ensure that they will be enforceable before a court. The shorter the restrictive covenant, for example 6 months, the more likely it is to be held enforceable. Therefore great care and attention should be taken when drafting restrictive covenants and to not simply adopt blanket bans or the like, which while easier, will undoubtedly down the road present enforceability problems.
If you require further advice regarding restrictive covenants or if you would like restrictions written into your contracts of employment contacts us today for a FREE 30 minute, no obligation consultation.
The Backhouse Solicitors Team
Tel: 01245 893400
Email: info@backhouse-solicitors.co.uk
Web: www.backhouse-solicitors.co.uk
