A guide to restrictive covenants and their significance within employment contracts

May 9, 2024

Restrictive covenants can be important tools in employment contracts, designed to protect an employer's proprietary interest by restricting the activities of an employee both during and after their period of employment. They help prevent employees from poaching clients, colleagues or suppliers from their previous workplace when they start a new job. Proper understanding and application of these covenants are crucial if relying on them to maintain a company's competitive edge.

Employers need to carefully decide which of their interests require protection to determine the appropriate covenants to use. They will need to take into account the nature of their business, the employee's role and the proprietary business interests (PBI) that it wants to protect. In the event of a dispute, an employer will be required to explain what these legitimate interests are and why they justify a restriction, whether that be trade connections, trade secrets, and/or workforce stability. Considering that the evaluation of the covenants is based on the employer's PBIs at the time the provisions were entered into, it is important to regularly review them whenever an employee's role changes.

Below we take a look at the main types of restrictive covenants and their enforceability:

• Non-solicitation of employees: Protects an employer's workforce stability by prohibiting ex-employees from actively seeking to recruit their former colleagues.
• Non-solicitation of clients/customers: Prevents ex-employees from contacting their former employer's clients/customers in an attempt to divert their business to their new employer. Whether solicitation has occurred is a question of fact and a former employee is only considered to have solicited a client if they have actively invited business. Non-solicitation clauses are typically easier to enforce than other clauses.
• Non-compete clauses: These can be highly restrictive, preventing former employees from working in any capacity with competitors. These clauses are notoriously difficult to enforce and are usually only applicable to senior employees whose move to a rival company could be damaging, and where lesser restraints, such as non-solicitation or confidentiality clauses, are unlikely to mitigate that damage. There has been discussion on banning non-compete clauses in employment contracts.
• Non-employment/poaching of employees: Prohibits ex-employees from recruiting their former co-workers. Such a clause would often only be suitable for more senior employees capable of hiring ex-colleagues in their new positions.
• Non-dealing with clients/customers: Protects a company's relationships with customers and, where appropriate, investors and lenders. These clauses prevent employees from being involved in the provision of goods or services to restricted customers, regardless of whether it was the employee or customer who initiated contact, thus avoiding the problem of proving solicitation. However, they are tougher to enforce and require employers to prove the potential for significant business losses without overt solicitation.
• Non-dealing with suppliers: These clauses aim to safeguard a business's relationships with its suppliers by prohibiting the employee from doing or attempting to do anything which would damage those connections. Such clauses may be justified when an employee's continued interaction with a supplier could negatively affect the employer - though that can be rare.

Once an employer has determined which restrictions to impose based on the PBIs that they wish to protect, they must ensure that these restrictions go only so far as is necessary in order to protect the relevant PBI.

One of the significant factors to consider when looking at the scope of a restriction is the amount of time for which the restriction applies post-termination - a restriction which is for an excessively long duration is likely to be unenforceable. It is essential to note that courts will not enforce an unreasonably long covenant for a shorter, more reasonable period, but will simply decide that it cannot be enforced at all.

Restrictive covenants are typically for periods ranging from three to 12 months, with the duration often reflecting the employee's level of seniority. The longer restrictions, particularly those extending up to a year, should generally only be used for the most senior employees due to the increased difficulty in justifying the limitation period. It is important to remember to periodically reassess and adjust the covenants over time in line with changes to an employee's role or status to ensure their continuing relevance and enforceability. For example, if a junior employee is subject to stringent covenants upon hiring and then rises to a senior position over a long period of time, those covenants may not be enforceable if they were not reasonable when the employee joined - even if they are appropriate by the time they leave.

When setting the duration of covenants, factors to consider include: the time it may take for a successor employee to establish themselves with business contacts; the employee's seniority; how involved they are in winning new business; customer loyalty trends; and the standard durations of such clauses among industry competitors' employment contracts.

When determining the enforceability of restrictive covenants, courts will evaluate several critical factors beyond the length of the restriction. These include the geographic scope, where wider areas may be harder to justify; the specificity and relevance of the covenant to the employee's role; any benefits the employee received for agreeing to the restriction; the employee's level of seniority; their access to confidential information or clients; and the loyalty of customers in the market. Additionally, courts will consider standard industry practices, as these can establish benchmarks for what constitutes a reasonable restriction. Each of these aspects plays a part in the court's assessment, highlighting the need for covenants to be fair, precise and proportionate to the interests they aim to protect.

There are various clauses that can be used in employment contracts which aid in enhancing the enforceability of restrictive covenants. These include the following:

• Potential new employers clause: This requires employees to inform potential new employers of their existing restrictive covenants, potentially deterring job offers that would lead to a breach and strengthening claims against new employers who might induce the employee to breach their covenants.
• Legal advice clause: This encourages employees to seek legal advice on their covenants, which can support the employer's position that the employee understood the implications upon entering the agreement. While this can make restrictive covenants more enforceable, its effectiveness is limited if the employer does not cover the cost of the advice. The use of such a clause in the UK is also not widespread or thoroughly tested in tribunals.
• Severability or "blue pencil" test clause: This allows for the modification of unenforceable parts of restrictive covenants by the courts, highlighting the importance of setting reasonable covenants from the start. However, courts cannot make substantial changes to the terms and there may be cost implications for employers attempting to enforce covenants which are too wide.
• Set-off against garden leave clause: This clause is beneficial as it permits employers to place employees on garden leave during their notice period, limiting their access to sensitive business assets. The time spent on garden leave is typically deducted from the duration of the restrictive covenants making them less onerous and so easier to enforce.

The strategic use of restrictive covenants is essential for protecting a business's vital interests and ensuring its longevity in a competitive market. Employers must navigate the balance between imposing necessary restrictions and being reasonable. As businesses grow and roles within them evolve, the regular reassessment of these covenants becomes paramount. By staying vigilant and responsive to the dynamic nature of business relationships, companies can enforce these covenants to deter breaches effectively and preserve their key assets.

Should you have any queries or require assistance with incorporating restrictive covenants into your employment contracts, please do not hesitate to reach out.