Bridge HR articles

In this article, Shaun Pinchbeck, Senior Employment Law Solicitor, explain what restrictive covenants are, what can be restricted and how to correctly present them to employees.

What are they?

A restrictive covenant is a clause which restricts what an employee can do after the termination of their employment. They are usually contained in the employees’ contracts.

They are sometimes referred to as 'restraint of trade clauses'.

What sort of activities can be restricted?

The most common are there to prevent the employee from:

• Setting up in business in competition with the employer.
• Working in any capacity for a business in competition with the employer.
• Soliciting clients/customers of the employer.
• Doing any work for any clients/customers of the employer; and
• Poaching or attempting to approach an employee of the employer to leave and work in a competing business.
  
  

Do they work?

Potentially, yes, when drafted specifically to particular roles where the employer can demonstrate that the employee in those roles could pose a legitimate threat to their business interest, for example, roles that have access to highly confidential information such as:

• • customer contacts;
  • customer requirements; and
  • pricing and contracting etc.

In these cases, yes, these provisions, if drafted properly, can absolutely serve you well to protect your business and to even secure:

• injunctive relief to prevent the employee from breaching them; and
• damages if you can demonstrate you have suffered losses as a consequence of any such breaches.

Whilst the employee is still employed by the employer, the employee also does still have legally implied duties of loyalty and good faith to the employer which, if materially breached, can allow similar redress but once they have left you need expressly drafted and agreed restrictions because once the employment ends, those legally implied duties cease to apply save for a limited application for example, the ongoing duty not to reveal trade secrets and such highly confidential information.

What threats do these contractual terms help with?

Without them, an employee could leave and immediately:

• work for a competitor;
• set up in direct competition;
• contact and sell to clients and customers; and / or
• contact the ex-employer’s key staff to poach.

We have witnessed many examples of senior people leaving, taking substantial parts of the custom and staff of a business and where, without well-drafted terms, frankly, the employer has limited redress.

Can they be imposed on the employee?

No, such terms must be drafted, set out and agreed upon carefully – to help ensure you can rely on them later.

The employer has to prove the employee had agreed to them.

The best way to do this is to include the restrictive covenants in the contract of employment from the start of the employment, making clear the offer of employment is conditional on agreeing to such terms.

It is much better to call it a 'contract of employment' rather than a 'written statement of terms', and to ensure it is signed by the employee, and kept on record safely!

A contract or statement which has not been signed runs the risk of an argument that the employee had not agreed to the restrictive covenants.

Employers need to be mindful when promoting an employee that restrictive covenants may need to be introduced or amended - a freshly signed contract would be ideal. All senior management and sales staff should have detailed clauses handling one or more of the following:

• confidentiality;
• return of property;
• garden leave and notice terms; and
• restrictions of the kind we discuss here applied carefully to each role.

Also, on promotion as well as the appointment, a newly signed document referring to the new role/increased remuneration and the covenants is needed, too, so that it is clear that there is legal ‘consideration’ i.e. a benefit to the employee, in return for agreeing to the restrictions of the covenants.

If the employee has signed an agreement to restrictive covenants, does that mean they are definitely legally binding?

Not always. This is where it gets complex and why advice should always be taken to prepare and apply such provisions to employees.

The reason for this is that the starting point (known as a ‘legal presumption’) in law is that it is contrary to public policy to restrict what people can do, that they and the clients should be free to choose. BUT, being a legal presumption, it is capable of being rebutted in law.

The employer then has the burden, if it came to enforcement, of satisfying a Court that the restrictive covenants were indeed reasonable in order to protect its legitimate business interests, it will need to demonstrate that.

Thus, a covenant preventing the employer from competing for three months after the employment ends has more chance of being upheld than one for a year, in some cases, depending on the seniority and threat the employee poses and the industry etc.

A covenant preventing the employee from soliciting clients who the employee personally dealt with in the last year of their employment has a good chance of being upheld whereas if it prevents soliciting of any clients at all (where the employee would not even know who they all are) it would be highly unlikely to be enforceable.

How does an employer maximise the chances of having enforceable covenants?

The simple answer is to take legal advice.

Before and whilst drafting, consideration has to be given to the following:

• the role in the business;
• the threat posed by the employee;
• the nature of the business and industry; and
• the nature and geographical spread of the business and the clients

It is possible just to have standard covenants, giving no proper consideration to the above, and save legal costs, but this runs the risk of having covenants that either are too generic and thus, inadequate, which is often the case, or, which may have very low prospects of being upheld. This in turn runs the risk of an ex-employee causing significant problems for the business.

Shaun Pinchbeck has been advising both employers and employees on restrictive covenants for over 30 years. Feel free to email shaun@bridgeehr.co.uk or call him for an initial no-commitment chat on: 07548 767505.