What are Restricted Covenants?

Restrictive covenants are essentially contractual clauses which restrain an employee from undertaking certain actions upon termination of employment.

These restrictions are generally designed to protect the employer’s business by preventing the employee from competing with, or otherwise negatively affecting the employer’s business, for example by poaching clients.

These clauses are often found in the contracts of senior employees that have close working relationships with clients or maybe in possession of confidential information or trade secrets.

There are several types of restrictive covenants

1. Confidentiality

A confidentiality clause imposes a duty on the employee to preventing the use or disclosure of genuine confidential information (which should be defined) both during and after employment.

2. Non-solicitation

This clause restricts employees from approaching the ex-employer’s clients or prospective customers.

3. Non-competition

Clauses which prevent the employee from setting up in competition to the ex-employer, or from working for a competing business.

4. Non-poaching

This clause prevents the employee from recruiting the ex-employer’s staff.

5. Non-dealing

This clause is similar to the non-solicitation clause, however it has a much broader scope, and prevents an employee from dealing with clients or potential customer’s of the ex-employer in any way, even if the client makes the first approach.

How enforceable are restricted covenants?

In order to enforce a restrictive covenant, an employer must be able to show that the clause is;

• Reasonable;
• Necessary to protect a legitimate business interest, such as trade secrets, client relationships, or the stability of the workforce;
• Of a justifiable duration and geographical area.

For example, a clause which prevents an employee from working for a competing business for a period of two years, anywhere in the country would be unlawful, as it would be an onerous restriction on the employee’s ability to obtain new employment. However, a six month restriction on an employer working for a competitor within a specific town is likely to be enforceable.

In certain circumstances, if a clause contains a mixture of unenforceable and enforceable elements, the court may choose to delete the unenforceable elements, so long as this would not require modifying the remaining wording.

Example: “The employee covenants with the Company that, for a period of six calendar months following termination of their employment, they will not be involved in any capacity with any business concern that is carried on within Merseyside, or anywhere in the UK, which is, or intends to be in competition with the Company.” 

In the above example, the words “anywhere in the UK” render the clause too broad in application, and therefore unenforceable. However, if the Court were to delete these words, then the remainder of the clause would still make sense without rewording or amendment, and may therefore be enforceable.

Whilst restricted covenants can help to protect business interests, their existence in employment contacts does not deem them automatically enforceable.

Remedies for Breach

If you believe that an employee has breached a restrictive covenant, then you may be able to apply for an injunction, and put an immediate stop to the employee’s actions.

The court will usually grant an interlocutory injection pending a full trial at which all the evidence will be considered.

An injunction will only be granted if the court is satisfied that there is a case to answer, and that the claim in not vexatious. The court will also look at the “balance of convenience” by weighing up the damage suffered by the employer if the injunction is not granted, against the damage or inconvenience suffered by the employee if it is.

In addition, the court will also consider whether the damage could be sufficiently remedied through compensation, and whether the employee would have the means to pay the compensation.

In order to claim damages for a breach of a restrictive covenant, it is necessary to demonstrate a loss resulting from the breach, which may include loss of opportunity.

Guiding You on Your Legal Journey

Kirwans Employment Law team are on hand to guide you through the complexities of contracts of employment.

For business clients we can help to ensure your business is protected and advise on any issues regarding restrictive covenants and likewise we can advise you and defend any claims against your business from ex-employers of new employees of your business being accused of working for your business in breach of restrictive covenants.

For individuals we can advise you on the enforceability of any restrictive covenants and your options.