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Introduction to restrictive covenants in employment contracts
Most businesses have confidential information that is crucial to their operation and ongoing success. An employee with knowledge of your business strategies, business contacts, internal processes and technology can be attractive to a rival company looking to gain a competitive edge. Restrictive covenants are the most effective way to protect your business from this threat.
A restrictive covenant is usually a clause in an employee’s contract designed to help a business protect itself against use of its private information by former employees. Reasonable and well-defined contractual restraints can deter employees from joining competitors and may discourage rival businesses from poaching your staff.
A restrictive covenant may prevent someone from competing against their ex-employer or stop them dealing with clients or customers with whom they became connected during employment at their former firm.
To be upheld in court a restrictive covenant must be shown to:
- Protect legitimate business interests.
- Go no further than is necessary to protect those interests.
A court will assess each case on its facts, so it’s vital that the conditions of your post-termination restrictive covenants fit the circumstances of each employee. What’s more, the fact you have taken the trouble to tailor the restrictions to that employee may help to persuade the court that you have carefully considered what is needed to protect your business’ interests.
What is a legitimate business interest?
Simply seeking to protect your business against competition from an ex-employee does not constitute a legitimate interest. Legitimate business interests that you can protect with a restrictive covenant include:
- Trade secrets and confidential information.
- Customer connections.
- The stability of your work force (preventing an ex-employee from encouraging his former colleagues to join him at his new employer or in his new business venture).
Incidentally, these are the same categories of legitimate interest that can be protected by a garden leave injunction.
Types of restrictive covenant
- Non-solicitation covenants prevent a former employee from poaching their ex-employer’s customers, clients or suppliers.
- Non-dealing covenants prohibit a former employee from dealing with their ex-employer’s clients, customers or suppliers.
- Non-poaching covenants prevent a former employee from poaching their ex-employer’s staff.
- Non-competition covenants restrict a former employee from working for a competing business (these are the most difficult restrictive covenants to enforce).
Enforcing restrictive covenants
To enforce a restrictive covenant against an ex-employee, an employer will usually seek contractually binding undertakings or if this is not felt adequate they may require the ex-employee to give undertakings to the court. If neither of these is offered or for some reason is not enough, the employer may seek a temporary (“interim”) injunction against the ex-employee.
When a court decides whether to grant such an injunction it will consider (among other things):
- Whether the injunction will serve a useful purpose.
- Whether the covenants have been or will be breached.
- How long the covenant will remain in force.
- Any delay by the employer in approaching the court.
- Whether an injunction would cause a breach of contractual commitments made to a third party.
- Whether the damage caused by the breach of covenant can be compensated by damages or some other financial remedy, such as an order to hand over the profits made by the ex-employee or his new employer.
Expert help with restrictive covenants
For a better understanding of restrictive covenants and their enforcement read our Restrictive Covenants Briefing Note.
For specific, expert advice on restrictive covenants, contact Gaby Hardwicke Employment Law Services Solicitor and Partner Paul Maynard, a recognised expert on restrictive covenant creation and enforcement.
See Paul’s answers to the most commonly asked questions on restrictive covenants in our FAQ videos.
Based in East Sussex but serving a much wider area, Gaby Hardwicke Solicitors has offices in Eastbourne, Bexhill and Hastings.