Restrictive Covenants – how do they work?

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If an important employee leaves your business, you might have concerns about them working for a competitor, poaching clients, using your sensitive data, or setting up shop on their own using your contacts. Fortunately, restrictive covenants exist to prevent this outcome. But how do they work, and when can you use them? 

In this article, the MIA’s Business Support Helpline partner, Croner, take a look…

What is a restrictive covenant?

It’s a clause in a contract prohibiting an employee from competing with an ex-employer. There are other types of restrictive covenant, but we’ll focus predominately on those in contracts in this article.

They usually last for a set period after the employee leaves the business and, depending on the type of clause, it can restrict employees from dealing with your customers.

Restrictive covenants in employment contracts

There are five types for use in employment contracts and documentation. These are:

  1. General confidentiality: It’s unlawful for the employee to divulge sensitive information about you or your clients.
  2. Non-competition: Prohibits the employee from working at a competitor or setting up on their own in the same field.
  3. Non-poaching: Prevents the staff member from poaching former colleagues / current staff from your organisation.
  4. Non-solicitation: Prohibits the employee from poaching your clients, customers and suppliers.
  5. Non-dealing: The employee can’t deal with your clients, customers, or suppliers, even if they didn’t approach them first.

Post-employment restrictive covenant duration

For covenants to be effective, you must specify this period in the clause, and be able to justify it.

Generally, a restriction of more than 12 months will be difficult to justify. Most restrictive covenants post-employment last between 6-12 months.

As well as the time period, you should also specify geographical location (if applicable).

Again, specificity is key. A large geographical area is much less likely to be justifiable than a single county. For example, restricting someone to working for a competitor within a 10-mile radius is likely to be fine, but a 100 mile radius is unlikely to be.

However, if you have clients across the globe, a worldwide restriction may be your only option.

In cases where the restrictions are too unreasonable, the employee could bring a claim against you and the restrictive covenant made void.

If you introduce one when their employment begins, you must gain their consent for it to come into force.

Failing to do so could result in a claim of constructive dismissal.

Enforcing restrictive covenants

To guarantee your clause is enforceable, you should ensure:

  • The covenant doesn’t deny the employee the right to make a living in their chosen industry or profession.
  • A clause isn’t as restrictive on the employee as is reasonably necessary.
  • There’s a legitimate business interest that requires protection.
  • It doesn’t prevent contact with relevant business contacts.

If you fail to meet these requirements, the covenant is unlikely to stand up in court.

Remember, an employee can negotiate the terms of the clause with you, and you should reasonably consider them.

Breach of restrictive covenant

In the event a former employee breaches the covenant you should first ask they stop working with your competitor (or cease whichever action it is that breaches the clause). It may just be an honest mistake.

If the employee refuses or ignores your request, you may seek an injunction.

This’ll mean the employee must destroy any confidential information they have—and stop the employee in their tracks.

You may also seek a financial remedy for damages or breach of contract—if you can prove there’s been a loss.

And you may sue your competitor if they encourage the employee to breach the restrictive covenant.

Restrictive covenant clause example

There are numerous types of clauses you might use, so we won’t document them all here. Below is an example of a non-competition clause:

“You acknowledge and agree that if you were to compete with <Company Name> immediately after termination we would be at a serious disadvantage. Unfair competition would do damage to the business, financial or otherwise. By signing this contract, you acknowledge that these restrictions are fair and reasonable for the protection of <Company Name>’s legitimate business interests.

For a period of <X Months> after your Termination Date, you won’t engage in business with or be in any way interested in any person, firm, company or organisation that conducts <Restricted Business> within the <Restricted Area>, either personally or by an agent, whether on your own or in association with another person/organisation.”

Expert support

As part of your membership with the MIA you can speak to a Croner expert for help with any of the above issues and get free in-depth, tailored advice. Email alice@mia.org.uk or call 01403 800500 for the exclusive Business Support Helpline scheme number.

www.croner.co.uk