We are often instructed by individuals who have been threatened with court action by their previous employer, seeking to enforce post termination restrictions contained within their employment contract. This can be very stressful and costly if the company decides to take further action.
The information below will help you to understand if you are in breach and what you can do to minimise the risk to you.
What is a restrictive covenant?
A restrictive covenant is a clause that is put in employment contracts purposely to ensure that the activities of employees are restricted for a period of time after they exit the employment relationship to protect the employer’s legitimate business interests.
Restrictive covenants must be drafted as narrowly as possible to protect the legitimate business interests of the employer, otherwise they will be void on public policy grounds and for restraint of trade. They must offer no more than an adequate level of protection of legitimate business interests, rather than imposing a blanket ban on all competition.
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 of 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 and the exploitation of business relationships by ex-employees, particularly when it is considered that every business has confidential information, knowledge and contacts that are integral to its overall success. Businesses have ownership of goodwill, client identities, requirements, pricing, suppliers and knowledge of the workforce including future business strategy. These things can all be included in the definition of “legitimate business interests” and employers will want to prevent others from using or damaging them.
Who should have restrictions imposed on them?
If the covenants that restrict you are applied across the board to all employees, that might make them more difficult to enforce. Restrictive covenants for senior management and members of staff are more likely to be enforceable if they have been drafted individually. This is because if you are a more senior employee, you are likely to have more client contact, knowledge of business strategy/trade secrets etc. If you are relatively junior and a covenant is too heavy handed, it risks being found to be unreasonable as it goes further than necessary to protect a legitimate business interest.
How long should a covenant be?
An employer needs to find a balance between ensuring the covenants are enforceable for enough time to protect their legitimate business interests, but at the same time ensure they are not too long, as there is more risk they will be deemed unenforceable. Restrictive covenants in employment contracts are usually between 6-12 months. However, there are no set time-limits, and a court would consider enforceability on a case by case basis, balancing the length of the restriction together with various other factors such as seniority, nature of the work, the renewal periods for client contracts, and more. Anything longer than 12 months tends only to be enforced in exceptional circumstances. When advising you, we would consider all of the relevant circumstances.
What do you mean by Consideration?
The employer must provide consideration, i.e. something in return for the benefit of being protected by the restrictive covenant. This is usually satisfied by the employee being entitled to a salary and benefits. If an employee is given a new contract during the employment, for example because of promotion, and it contains new restrictive covenants, there should usually be some additional consideration provided at that point. This can either be financial consideration such as a pay increase or benefit. Alternatively if the new contract is signed as a deed, that will amount to consideration. If no consideration was given for new covenants, arguably those restrictions are not enforceable against you, but you may still be bound by the covenants in your original contract.
What is the ‘blue pencil test’?
As already mentioned the courts are reluctant to introduce new wording or limitations. However, they can remove void provisions from the covenants, leaving the remaining provisions intact and enforceable, but only if removing the unenforceable wording does not change the nature of the employment contract. This is the ‘blue pencil test’.
What is Garden Leave?
A garden leave clause is not a restrictive covenant. It is a contractual clause which aims to prevent you immediately working for a competitor. A garden leave clause means that the employer has the option to continue to employ and pay the employee during a given period, without requiring them to work and preventing them from having access to customers, colleagues, information, and the premises. Whilst (on paper at least) still working for their current employer, the employee continues to be bound by their employment contract and the employee duty of good faith. Where there is a garden leave clause and restrictive covenants, it is likely that time spent on garden leave would count towards the period the restrictive covenants apply to. Garden leave clauses can be easier to enforce than restrictive covenants.
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. However, for general guidance, there are key factors the courts have considered in various cases to determine whether a particular covenant is likely to be enforceable against an employee, including the following:
- Does the covenant seek to protect a legitimate business interest and is it clear about what interests it seeks to protect?
- Is it reasonable taking into account the parties’ interests and the public interest?
- Is it any wider than necessary?
- How senior was the employee and what access and influence over customers did they have, or what knowledge did they have of the employer’s affairs?
- What shelf-life did any restricted information have?
- Are the lengths of customer contracts/ timings of customer renewal dates relevant to the length of the restrictions?
- Is the geographical area reasonable taking into account the area of the employee’s activities and the nature of the area?
- How specialised is the business? Is a very wide geographical restriction reasonable given the limited number of businesses worldwide that carry out that business?
- How long would it reasonably take for a replacement employee to settle and establish relationships with customers etc. for themselves?
- What was the typical frequency of contact with customers/the exclusivity of those relationships?
When should legal advice be taken?
If you know you will be leaving a company and you have restrictions which might affect you, take advice before you resign. We can consider your individual circumstances and ensure you understand the restrictions. We can advise on the chances they would be enforceable against you, and what you can and can’t do.
If you have already resigned or left your employment and you have been contacted by your former employer alleging that you have breached your covenants, and/or asking for undertakings that you will not breach them, we can advise you. You should carefully note any deadlines to respond to this type of letter and take advice in good time.
What remedies are available?
Before resorting to court proceedings, it is common for former employers to write and seek undertakings from the former employee. An undertaking is a legally binding promise to do or not to do something, such as not to work for a competitor, or not to set up a competing business, and agreeing to abide by the restrictive covenants in the contract. You should seek advice if you receive a letter asking for undertakings and take careful note of any deadlines; you may not be given much time to respond if the former employer considers the matter urgent.
If you do not provide the former employee with the undertakings they ask for, and cannot otherwise come to an agreement with them, their next step may be to issue court proceedings for breach of contract.
There are various remedies that can be sought from the court by your former employer:
An injunction is a court order in which the court orders a party to do or not to do something, An injunction is discretionary, meaning the court will only usually only grant one where a financial remedy such as damages is not adequate, for example where the individual is using confidential information or poaching employees for their own new business, and they need to put a stop to that quickly before further damage is done to the business. Where an injunction is needed, typically it is needed urgently, so the former employer would probably seek an interim injunction to begin with.
An interim injunction is an emergency injunction that an employer can seek from the court at short notice, before the matter goes to a full trial. They have to persuade the court that there is a serious issue, and that the individual will do damage to their legitimate business interests if they are not prevented promptly from breaching the covenant(s). A court will often assess the merits stringently and will require persuasive evidence at the interim stage even though it is not a full trial, because by the time the case reaches trial the restriction time periods may have expired in any event. An interim injunction might, for instance, order an individual to stop working for a competitor, or order them to comply with their restrictive covenants.
In addition to enforcing post-termination restrictive covenants, injunctions can be used to enforce garden leave clauses and breaches of disclosure and use of confidential information. There are also springboard injunctions, which prevent commercial gain as a result of being in possession of the employer’s confidential information.
An employer might seek damages, i.e. a payment of money, in addition to an injunction, if loss is attributable to the breach of covenant. Alternatively they might only seek only damages if for example, all the possible damage has already been done and damages will be an adequate remedy.
- Account of profits
Sometimes it can be difficult to attribute the loss as a result of the breach of restrictive covenant. This alternative remedy is recovery of the profits the individual may have made as a result of the breach of covenant. 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. The former employer may prefer to sue the new employer as they will probably have greater resources than the individual. If you have a prospective new employer, they will probably ask to see a copy of your restrictive covenants for that reason.
If you need advice on your restrictions contact us at [email protected] or call our Sheffield office on 0114 303 2300 or London office on 020 329 0280 for a free confidential conversation.