There is a myth that restrictive covenants in employment contracts are not legally enforceable. This is not true. Although restrictive covenants can be difficult to enforce, they can be legally binding in the right circumstances.
Restrictive covenants are clauses in an employment contract that seek to restrict what an employee can do after leaving their employer. They are commonly used to protect a business from competition, the loss of customers and the misuse of confidential information.
However, employers cannot simply prevent former employees from working wherever they want or earning a living in their chosen profession. Whether a restrictive covenant is enforceable depends on the wording of the clause, the circumstances in which it was agreed and the interests the employer is seeking to protect.
What types of restrictive covenants are there?
There are several types of restrictive covenants commonly found in employment contracts.
Non-compete clauses
These clauses seek to prevent an employee from working for a competing business or setting up a competing business after leaving their employer. They can be particularly restrictive because they may prevent an employee from working in their chosen industry for a period of time.
Non-solicitation clauses
These clauses seek to prevent a former employee from approaching or attempting to win business from customers or clients of their former employer.
Non-dealing clauses
These go further than non-solicitation clauses. They seek to prevent a former employee from doing business with specified customers, even where the customer approaches the former employee without being solicited.
Non-poaching clauses
These clauses seek to prevent a former employee from encouraging colleagues or other employees to leave their former employer and join another business.
Employment contracts may contain one or more of these restrictions. Each clause must be considered individually to determine whether it is legally enforceable.
When are restrictive covenants legally enforceable?
Under English law, restrictive covenants are generally presumed to be unenforceable unless the employer can demonstrate that they are reasonable and protect a legitimate business interest.
Legitimate business interests may include:
- Protecting confidential information and trade secrets.
- Protecting customer connections and goodwill.
- Protecting the stability of the employer’s workforce.
- Preventing the misuse of commercially sensitive information.
An employer cannot normally impose a restriction simply to prevent an employee from competing or to make it more difficult for them to find another job.
The courts will consider whether the restriction goes no further than is reasonably necessary to protect the employer’s legitimate interests. This involves looking at the wording of the clause and the circumstances of the particular employment.
How long can a restrictive covenant last?
The duration of a restriction is an important factor when considering enforceability.
For example, a restriction lasting three months may be reasonable in one situation but excessive in another. A restriction lasting 12 months may be justified for a senior employee with access to highly sensitive commercial information, but could be difficult to justify for an employee with limited responsibility or customer contact.
There is no universal rule that restrictive covenants lasting three, six or 12 months are automatically enforceable or unenforceable.
The courts will consider the nature of the employee’s role, the business interests being protected and whether the duration is reasonably necessary.
Can an employer prevent an employee from working for a competitor?
A non-compete clause is often the most controversial type of restrictive covenant because it can significantly affect an employee’s future career.
The courts generally scrutinise non-compete clauses carefully. An employer will need to demonstrate that the restriction is justified by a legitimate business interest and is reasonable in its scope and duration.
For example, a senior employee who has access to sensitive pricing information, strategic plans and key customer relationships may present different risks to an employer than an employee who has little access to confidential information.
A non-compete clause that prevents an employee from working anywhere in their industry, regardless of their role or the nature of the competing business, may be difficult to enforce if it is wider than necessary.
Employees should not assume that a non-compete clause is invalid simply because it restricts their future employment. Equally, employers should not assume that a clause will be enforceable merely because the employee signed the contract.
What happens if a restrictive covenant is too wide?
A restrictive covenant may be unenforceable if it is drafted too broadly or goes beyond what is reasonably necessary to protect the employer’s legitimate business interests.
For example, a clause might attempt to prevent an employee from dealing with every customer of the employer, including customers with whom the employee has never had any contact. Depending on the circumstances, that restriction may be wider than necessary.
In some circumstances, a court may be able to sever an offending part of a restrictive covenant, leaving the remainder enforceable. However, an employer cannot assume that a court will rewrite an unreasonable clause to make it enforceable.
Careful drafting is therefore essential. Restrictions should be tailored to the employee’s actual role, the business interests being protected and the risks that arise when the employment ends.
What happens if an employee breaches a restrictive covenant?
An employer who believes that a former employee has breached a restrictive covenant may consider taking legal action.
Depending on the circumstances, the employer may seek an injunction to prevent the employee from continuing the alleged breach. An injunction can be particularly important where the employee is alleged to be soliciting customers, misusing confidential information or working in breach of an enforceable non-compete clause.
An employer may also seek damages where it can establish that the breach has caused a recoverable financial loss.
However, legal proceedings can be expensive, and the employer will need to consider whether the restriction is enforceable, whether there is evidence of a breach and whether urgent action is justified.
Employees who receive a solicitor’s letter alleging a breach should not ignore it. They should obtain legal advice before responding or taking steps that could expose them to further legal action.
Can an employer enforce restrictive covenants if an employee resigns?
Restrictive covenants are generally intended to apply after employment ends, regardless of whether the employee resigns or is dismissed. The precise wording of the contract is important.
The circumstances in which employment ends may also be relevant. For example, where an employee alleges that their employer has fundamentally breached the employment contract, this may affect the employer’s ability to rely on certain contractual restrictions. The position depends on the facts and the wording of the agreement.
Employees should therefore avoid assuming that restrictive covenants automatically fall away because they have been dismissed or because they believe their employer has acted unlawfully.
Should restrictive covenants be included in every employment contract?
Not necessarily. Employers should consider the nature of their business and the roles of individual employees before deciding which restrictions are appropriate.
For some employees, confidentiality provisions and carefully drafted non-solicitation clauses may provide sufficient protection. For others, particularly senior employees with access to sensitive information or important customer relationships, additional restrictions may be justified.
Employers should also review their contracts periodically to ensure that the restrictions remain appropriate and reflect the legitimate interests of the business.
Employees should read restrictive covenants carefully before signing an employment contract, particularly if they are moving to a role where they may be subject to similar restrictions in the future.
Can I get legal advice about restrictive covenants?
Restrictive covenants can have significant consequences for both employers and employees. An employer may need to protect valuable customer relationships and confidential information, while an employee may be concerned that a restriction will prevent them from taking up a new job or pursuing a career opportunity.
The enforceability of a restrictive covenant depends on its precise wording and the circumstances of the case. It is therefore important to obtain legal advice before assuming that a clause is enforceable or that it can safely be ignored.
Hastings & Co Solicitors are based in Maldon and can advise employers and employees on employment law issues. Please contact Liam Hastings by email on liam@hastingsandco.co.uk or by telephone on 01621 876 031