Restrictive covenants - key issues and common pitfalls

Tom Clarke, Employment & HR

The pandemic has caused a lot of people to rethink different aspects of their lives and to decide to make some changes, whether in relation to their priorities, their lifestyle or their work.

As a result, we have seen an increase in clients concerned about departing employees who have taken new jobs or decided to set up their own business, often in competition.

These are hardly unusual occurrences, but it is essential that employers prepare for these situations carefully at the start of the employment relationship in order to protect their business. For example, it’s not unusual for employees of sufficient seniority, or with access to confidential information, to have ‘restrictive covenants’ included in their employment contract , which are designed to provide a degree of protection for the employer when the employee decides to move on.

A restrictive covenant aims to protect the business by limiting the activities of a former employee for a defined period of time, usually between 6 – 12 months. For example, they make seek to prevent an ex-employee from working for a competitor, soliciting or dealing with customers and clients, or poaching former colleagues. If the ex-employee then breaches a restriction, the former employer can ultimately apply to the court for an order to enforce it.

In practice, however, they can be very difficult to enforce, not to mention costly and complicated and it is crucial that the covenants are no more restrictive than is absolutely necessary to protect the business, or a court would be unlikely to uphold it. For example, restrictions are often deemed unenforceable because they are longer than strictly necessary or are drafted too widely.

Courts are, for example, often reluctant to enforce a non-compete clause given the inevitable impact it would have on an individual’s ability to earn a living.

Indeed, this latter issue is under consideration as part of an ongoing government review into the use of restrictive covenants, which is considering whether employers should be required to pay an ex-employee’s salary for the duration of the restriction or even whether such clauses should be abolished entirely.

However, restrictive covenants undoubtedly still have their place as a way of protecting your business and here are some key considerations when considering using and enforcing restrictive covenants:

• Ensure restrictive covenants are carefully and appropriately drafted so they are no more onerous than absolutely necessary. Avoid a ‘one size fits all’ approach in employment contracts as individual circumstances will likely need particular tailoring.

• Consider whether existing restrictions need updating or whether fresh restrictions are required when an employee is promoted. Whether a restriction is reasonable is judged at the time it was entered into, so old employment contracts may no longer be appropriate.

• If an employee leaves employment, politely remind them of their obligations under their contract of employment so there can be not argument that the employee was not aware of the restrictions.
  Closely monitor the activities of departing or former employees. If you do suspect that they are breaching their obligations, it’s essential to gather firm evidence that your business is suffering, or is at risk of, material losses as a result of these behaviours as quickly as possible. Check IT systems for downloads or suspicious emails.

• If you become aware of a breach of restrictive covenants, take advice immediately. Delaying enforcement of the restrictions can seriously undermine your case. The employee should be notified of the breach and given an opportunity to cease the offending actions but, ultimately, an urgent court application may be required.

For advice on business protection and all aspects of employment law, please get in touch.