We are often instructed by Companies seeking to enforce post termination restrictions against an ex-employee who poses a threat to their business. We have put together this guidance on the essential considerations when drafting and seeking to enforce restrictive covenants.
What is restrictive covenant?
A restrictive covenant is a clause that is put in employment contracts purposely to ensure that the activities of employees are restricted after they exit the employment relationship for a limited period of time to protect the employer’s legitimate business interests.
Restrictive covenants have to be drafted as narrowly as possible to protect the legitimate business interests of the employer, otherwise they will be void on public policy grounds.
What are the different types of restrictive covenants?
The types of restrictive covenant include:
- non-competition covenants – this prevents the former employee working in similar employment for a competitor company or business
- non-solicitation covenants –this prevents the poaching of customers, clients and suppliers of the former employer
- non-dealing covenants – this prevents a former employee from dealing with clients, customers and suppliers who still work for the former employer regardless of which party it was that approached the other
- non-poaching covenants – which prevent an employee poaching former colleagues
Why impose restrictions?
It is not surprising employers wish to impose restrictions on the use of information by ex-employees, particularly when it is considered that every business has confidential information and knowledge that is integral to its overall success. This includes but is not limited to client identities, requirements, pricing, suppliers and knowledge of the workforce including the future business strategy.
In a time of economic uncertainty ensuring ex-employees behaviour post service is restricted is important, which is why many business implement post-termination restrictive covenants in their employment contracts. It is a way for businesses to adequately protect their legitimate business interests.
Who should have such restrictions imposed upon them?
It is essential that the same restrictive covenants are not simply implemented in all employment contracts and applied across the board. This is because it makes them difficult to enforce as justification of the necessity of the covenants is significantly reduced.
It is important that restrictive covenants for senior management and members of staff are drafted individually because unlike other junior members of staff, they are going to have more client contact, knowledge of business/trade secrets etc.
Do you need to explain the purpose of the restrictive covenant?
A preamble to explain the purpose of the covenant is not necessary but may aid the employer in protecting its legitimate business interests. Preambles should be carefully thought over as if the employers considers there are other business interests at the time of the contract which are not listed in the preamble, this could affect the authority of the covenant in question and potentially result in it not being upheld.
How long should a covenant be?
An employer needs to find a balance between ensuring that they are enforceable for enough time to protect their legitimate business interests, but at the same time ensure that it isn’t too long that it is easily deemed unenforceable. Restrictive covenants in employment contracts are usually between 6-12 months. A covenant longer than 12 months is usually not enforced regarding workforce relationships and are only ever applied in very exceptional circumstances. In J A Mont (UK) Ltd v Mills (1993) it was held that covenants will not be re-written or limited by the courts if they are too broad in scope to be enforceable.
What do you mean by Consideration?
The employer must provide consideration for the restrictive covenant. This is usually satisfied where the contract stipulates the employee is entitled to a salary and specific benefits.
What is the ‘blue pencil test’?
As already mentioned the courts are reluctant to introduce new wording or limitations. However, they will remove provisions from the covenant if there is no need to add new wording and removing the unenforceable wording does not change the nature of the employment contract. This is the ‘blue pencil test’.
What if I want to update a covenant?
The same process should be followed when an employment contract is updated. It is advised that when an employee is given a promotion or their position changes they are presented with a new or adapted employment contract to sign. Similarly, restrictive covenants should be reviewed in this instance, and employers should use changes to the employment contract to update restrictive covenants. Bonuses, a pay rise or promotion make employees more willing to agree to the updated covenant.
It was established in Willow Oak Developments Ltd v Silverwood (2006) that an employer is entitled to protect its legitimate business interests through changing/varying their employment contracts and adding an additional restrictive covenant. However, employers must be careful when doing this because it has to be evidenced that the employee has agreed to be bound by the new restrictive covenants introduced by the employer.
What is Garden Leave?
A garden leave clause is whereby the employer remains employing the employee during all or part of their notice period but does not require them to work. There are some benefits to the employer if they impose a garden leave clause and post-termination restrictive covenant within an employment contract.
What happens if the employer breaches the employment contract?
It is more difficult for the employer to rely on the employee’s post-termination restrictive covenant if they themselves have breached their contract. For example, a payment in lieu of notice clause must be implemented in the contract if the employer wishes to terminate the contract immediately without cause.
When is a covenant enforceable?
This fundamentally depends on the circumstances in every case but there are things that can be considered as discussed in this article that determine whether or not the covenant is likely to be enforced.
In order to enforce a post-termination restrictive covenant against an employee when it has been breached by them the employer must seek a Court order. The court has ultimate discretion and considers all the circumstances involved. Those that obtain the moral high ground are usually the parties the court is likely to side with.
In summary, these are the key things to consider when intending to impose an ‘enforceable’ restrictive covenant:
- Garden leave less likely to be challenged than RC
- If the RC states that any restricted period is reduced by time already spent on garden leave
- The ‘blue pencil test’
- Update covenants
- A breach of the employment contract by the employer could render the post-termination RC void
When should legal action be taken?
Employers should seek legal advice before attempting to enforce restrictive covenants. If a single covenant has been implemented across the board, this can have a significant impact for all of the other employer’s employees if it is held that covenant is unenforceable against the employee in question. This may result in the deterrent effect of the covenants in the contracts also being lost. That is why it is highly advisable legal support/advice is sought regarding attempts to enforce them.
What remedies are available?
There are generally two remedies that can be sought from the court:
- Injunctions which include:
- Interim Injunctions – this stops or prevents the employee from breaching the restrictive covenant
- Garden leave Injunctions – enforce a period of garden leave
- Post-termination restrictive covenants
- Confidential information injunctions – prevent the employee using it
- Springboard injunctions –prevent the commercial gain as a result of the restrictive covenants’ breach
- Damages – if loss is attributable to the breach of the covenant
- Account of profits – when it is difficult to attribute the loss as a result of the breach of the restrictive covenant, this is an option for a remedy. It is recovery of the profits the individual has made. It is exercised on the discretion of the court.
- Suing competitors – the former employer can sue the new employer if the new employer has induced or attempts to induce the employee to breach the covenant.