Articles | Restrictive covenants in employment contracts

Restrictive covenants are a valuable weapon for any employer who needs to protect its business and market position following the departure of a key employee.

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Ian Machray

Ian Machray

What are restrictive covenants?

Restrictive covenants are a valuable weapon for any employer who needs to protect its business and market position following the departure of a key employee. Restrictive covenants are clauses in contracts of employment which restrict an employee's activities after their employment has ended (whether by dismissal or resignation) for a fixed period of time.  They are crucial for employees, such as key sales personnel, who have had access to and who have knowledge of an employer's customer base.

Different types of restrictive covenants

There are broadly four types of restrictive covenants:

  • Non-compete covenants – which seek to prevent an ex-employee from directly competing or working for a competitor, usually within a specific geographical area, for a period following termination.
  • Non-solicitation/non-dealing covenants - which seek to prevent an ex-employee from entering into working relationships with former customers, by seeking or accepting orders for goods and services for a period following termination.
  • Non-poaching/non-solicitation of employees/workers covenants - which seek to prevent an ex-employee from recruiting former colleagues for a period following termination.
  • Non-interference with suppliers.
  • In addition, there are restrictions on the use of confidential information, which seek to prohibit the use of any such information acquired by an employee during employment. The restriction applies both during employment and after employment has ended for an indefinite period. Confidential information is  usually defined by a non-exhaustive list of examples in the employment contract or staff handbook.

Enforceability

Restrictive covenants need to be carefully drafted to be enforceable and it is wise to seek professional advice. They should be specifically drafted for different categories of employees and should be kept under regular review as the circumstances of the business and the employee's role change. Restrictive covenants will only be enforceable if they are no wider than is reasonably necessary to protect an employer's legitimate proprietary interests i.e. trade secrets and trade connections, skilled workforce and valuable contacts/clients.

Any period spent on garden leave should be offset against the length of the restriction.

Restrictive covenants need to be drafted to take into account a specific employee's circumstances in the business. For example, a covenant preventing an employee from working for a competitor for a period of 6 months anywhere within the United Kingdom may be enforceable against a national sales director, but it would not be enforceable against an office junior who has had no access to client and sales information which is key to the business' competitiveness.

Once an employee's contract of employment has terminated, it is sensible to draw the restrictive covenants to the employee's attention. In the event that, subsequently, it comes to the employer's attention that the employee is in breach of the restrictive covenants, the new employer can be contacted and the restrictive covenants drawn to their attention and if appropriate legal proceedings can be issued to restrain any breaches by the ex-employee and/or the new employer and to recover any losses.