Restrictive Covenants – are they worth the paper they’re written on?
21 Jun 2022
Employment, Intellectual Property
It is understandable for an employer to want to protect its business in the event that one of its senior employees or leading sales staff leave the business.
They will have been in contact with major clients and will have built relationships with them and could entice those clients away. But how can an employer achieve that protection?
Restrictive covenants appear in many contracts of employment and service agreements, and other commercial agreements, but all too often they are not enforceable.
To be enforceable, a restrictive covenant must not be an unlawful restraint on trade – meaning that it must not stop the employee earning a living. It must be no longer in time or extensive in nature than is necessary to protect the employer’s legitimate business interests in the market in which they operate.
When the parties agree the terms of the contract, they need to understand the construction of the restrictive covenants. It needs to be clear from the wording what the covenants are intended to do and what was in the contemplation of the parties when the contract was made.
They should be drafted to only protect the employer’s legitimate business interests, so they should only cover the area of the business in which the employee worked and it is reasonable for the employer to want to protect.
Taking the above into account, there are some rules to apply to try to ensure the validity of restrictive covenants in employment agreements/service agreements :
- Employers should make sure they understand what they want to protect, and that the covenants are precise. This will often mean that restrictive covenants are long and detailed and there will be definitions of terms such as “Restricted Business” and “Restricted Client”. Employers should resist the urge to shorten or simplify covenants, as in doing so, something may be missed out which may make the covenant unenforceable.
- Employers, and the covenants, need to be clear as to what legitimate business interests they are trying to protect. For instance, if the employer deals with the sale of agricultural equipment, and the employee is leaving to work with a supplier of agricultural chemicals, restrictions should not apply, as the employer has no legitimate business interest in agricultural chemicals. They should only cover the employee going to work in the same area of business.
- The covenants should last no longer than reasonable to protect the employers’ business interests. Employers frequently want long covenants – 12 months or even more – but then cannot justify why they need to be so long. There may be a good reason for such a long period, for instance, in the insurance industry where policies are only renewed every 12 months and so employees are in touch with the clients only annually. However, for many businesses, keeping an employee out of circulation post-termination for 3 or maybe 6 months will be sufficient to enable the employer to cement its relationships with its clients before the employee starts with a competitor business.
- The same considerations apply to geographical restrictions. For instance, if the employer only operates in the North of England, then restrictions should not apply UK wide.
- Restrictions are unlikely to be enforceable against junior employees whose departure to a competitor would impose no risk to the employer.
If a dispute arises about whether the terms of a restrictive covenant are enforceable or not, it is open to the courts to delete words from a covenant – known as “blue-pencilling”, but the courts will not otherwise amend the wording to make a covenant enforceable. Accordingly, it is best to get the covenants right at the outset when the contract is drafted.
If restrictive covenants are not enforceable, employers can consider enforcing other terms of the contract, such as confidentiality or intellectual property clauses. Also, if an employee has started to take steps to compete before the employment terminates, there may be scope for a breach of trust or breach of duty of fidelity claim.
If you are promoting or moving an employee to a new role, consider whether you need to amend their restrictive covenants, or impose covenants for the first time. For an existing employee, there will need to be some sort of payment for their agreeing to these restrictions in order to make them contractually binding.
If an employer tries to enforce restrictive covenants through court action this will usually involve an injunction to prevent the employee breaching the covenants and a claim for damages. As with all litigation, there will be an examination of the facts, which often includes looking to customers for information and evidence, which may not be good for business. Even tightly drawn covenants can be found to be unenforceable in some circumstances and there is no guarantee of success in litigation. Enforcing restrictive covenants through court action is an expensive exercise and proceedings should only be issued when the employer has a good expectation of success and deep pockets! Before bringing proceedings, employers need to consider if their time and money is better spent on working with their client base to try to keep them on board, rather than suing a former employee.
For more information please contact Marina Vincent, Partner Dispute Resolution, Employment at email@example.com