A Guide To Restrictive Covenants For Employers
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What Are Restrictive Covenants?
Restrictive covenants are clauses in employment contracts that limit what an employee can do after their employment ends.
They are designed to protect a business from unfair competition and safeguard valuable business interests, such as customer relationships, confidential information, and workforce stability.
Restrictive covenants can help prevent former employees from:
- Soliciting customers.
- Approaching colleagues to join a competitor.
- Dealing with former clients.
- Competing directly with the business.
- Misusing confidential information.
However, restrictive covenants are only enforceable where they are reasonable and necessary to protect legitimate business interests.
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When Will a Restrictive Covenant Be Enforceable?
Restrictive covenants are generally unenforceable unless they protect a legitimate business interest.
The courts recognise only a limited number of legitimate business interests, including:
Customer and Client Relationships
Businesses are entitled to protect valuable customer connections and goodwill developed through their workforce.
Confidential Information and Trade Secrets
Businesses may protect confidential information, trade secrets, pricing structures, strategic plans, client data, and other commercially sensitive information.
If a covenant protects one of these interests, it must still be no wider than reasonably necessary.
When determining enforceability, courts will consider:
- The employee’s role and seniority.
- The nature of the business.
- The activities being restricted.
- The length of the restriction.
- The geographical area covered (where relevant).
Drafting Restrictive Covenant
Restrictive covenants should be carefully tailored to each employee and business.
They should:
- Reflect the employee’s role and responsibilities.
- Protect a specific business interest.
- Go no further than necessary.
- Be reviewed regularly as roles evolve.
A restriction that may be enforceable for a senior executive may not be enforceable for a junior employee.
Employers should review restrictive covenants whenever:
- An employee is promoted.
- Responsibilities change significantly.
- The business enters new markets.
- Existing contracts are updated.
Non-Solicitation Covenants
A non-solicitation covenant prevents a former employee from actively approaching customers after leaving the business.
These restrictions are particularly useful where employees have built strong relationships with customers.
Typically, restrictions should only apply to customers:
- With whom the employee had direct dealings; and
- During a specified period before their employment ended.
When determining the appropriate duration, employers should consider:
- How long it will take a replacement employee to establish customer relationships.
- The employee’s level of influence.
- The nature of the industry.
- Customer loyalty within the market.
- Restrictions commonly used by competitors.
Restricting Contact with Prospective Customers
Restrictions covering prospective customers are generally harder to enforce.
However, they may be enforceable where genuine prospective customers are clearly identified and there is a legitimate business interest in protecting those relationships.
Restricting the Solicitation of Employees
Employers can also use restrictive covenants to prevent former employees from poaching colleagues.
Workforce stability is recognised as a legitimate business interest.
These restrictions should usually focus on:
- Employees over whom the former employee had influence.
- Employees at the same or a more senior level.
Non-Dealing Covenants
A non-dealing covenant goes further than a non-solicitation covenant.
Rather than preventing a former employee from approaching customers, it prevents them from providing services to those customers altogether, even if the customer initiates contact.
The main advantage is that employers do not need to prove who made the first approach.
However, because these restrictions are wider in scope, they are often subject to greater scrutiny by the courts.
The likelihood of enforcement will depend on factors such as:
- The strength of the employee’s customer relationships.
- The nature of the business.
- Whether the restriction is proportionate.
Non-Competition Covenants
A non-competition covenant restricts a former employee from working for, or establishing, a competing business after leaving employment.
These restrictions are generally the most difficult to enforce because they prevent an individual from earning a living in their chosen field.
Employers should remember that employees are already subject to ongoing obligations not to disclose trade secrets and confidential information.
As a result, courts will only enforce non-competition restrictions where lesser protections would not adequately safeguard the business.
Examples may include situations where:
- The employee has significant influence over customers.
- The employee has access to highly sensitive strategic information.
- The employee occupies a particularly senior role.
Practical Tips for Employers
To maximise the chances of enforcement:
- Tailor restrictions to the individual employee.
- Avoid using standard wording for every employee.
- Review restrictions regularly.
- Keep restrictions proportionate.
- Ensure restrictions reflect genuine business risks.
- Seek legal advice when drafting or updating contracts.
Well-drafted restrictive covenants can provide valuable protection, but poorly drafted restrictions may be unenforceable.
Frequently Asked Questions (FAQs)
What is the purpose of a restrictive covenant?
A restrictive covenant protects a business’s legitimate interests after an employee leaves by limiting certain activities such as soliciting customers, poaching staff, or joining a competitor.
Are restrictive covenants automatically enforceable?
No. Restrictive covenants are only enforceable if they protect a legitimate business interest and are no wider than reasonably necessary.
What is considered a legitimate business interest?
The courts generally recognise:
- Customer and client relationships.
- Trade secrets.
- Confidential information.
- Workforce stability.
How long can a restrictive covenant last?
There is no fixed rule. The restriction must be reasonable in the circumstances. Common periods range from three to twelve months, depending on the employee’s role and the interest being protected.
Can a restrictive covenant apply worldwide?
Potentially, but only where a worldwide restriction is genuinely necessary to protect the employer’s business interests. In many cases, a narrower geographical restriction will be more likely to be enforceable.
What is the difference between a non-solicitation and a non-dealing covenant?
A non-solicitation covenant prevents a former employee from actively approaching customers.
A non-dealing covenant goes further by preventing the former employee from providing services to those customers even where the customer makes the approach.
Can I stop a former employee from contacting my staff?
Often yes. A restriction preventing a former employee from encouraging colleagues to leave and join a competing business can be enforceable where it protects workforce stability.
Are non-compete clauses enforceable?
Sometimes. Courts will scrutinise non-compete clauses carefully and generally only enforce them where less restrictive measures would not adequately protect the business.
What happens if a restrictive covenant is too broad?
A court may refuse to enforce the restriction altogether if it goes beyond what is reasonably necessary to protect the employer’s legitimate interests.
Should restrictive covenants be reviewed regularly?
Yes. Restrictions that were appropriate when an employee joined the business may become outdated if their role, responsibilities, or level of influence changes.
Can a business take legal action if a restrictive covenant is breached?
Yes. Depending on the circumstances, an employer may seek an injunction to stop the breach and may also pursue a claim for damages.
What is the best way to ensure restrictive covenants are enforceable?
Restrictive covenants should be tailored to the employee’s role, reviewed regularly, and drafted carefully to ensure they are reasonable and proportionate.