Protecting your Business: Why have Restrictive Covenants?
What are restrictive covenants?
Restrictive covenants are terms employers may use in the employment contract to protect their business. The employee essentially agrees not to act in a specified manner once they have left your employment.
Why it is important to have them?
During employment, there are some terms that are implied, such as the implied term of trust and confidence. However, in order to ensure that your business is fully protected after your employee leaves, it is advisable to have express terms which may include restrictive covenants. Restricting the use of important and invaluable information to your business post-employment provides vital protection. In the absence of any express “post-termination restriction,” the employee will be free to:
- Compete with your business
- Use your confidential information (not amounting to trade secrets)
- Solicit business from you
- Solicit your staff to leave you and join their competing business
What are the types of restrictive covenants?
There are four types of restrictive covenants:
- non-competition covenants – restrictions on your former employee working in similar employment for one of your competitors;
- non-solicitation covenants – which prevent them poaching your clients/customers/suppliers;
- non-dealing covenants – which prevent them from dealing with former clients/customers/suppliers, regardless of which party approached the other;
- non-poaching covenants – which prevent an ex-employee from poaching former colleagues.
Are restrictive covenants enforceable?
The presumption made is that any post-employment restriction is void as it is a restraint of trade and contrary to public policy. However, the ex-employer may be entitled to protection if they can convince the court the restrictive covenant:
- is designed to protect his or her legitimate business interests; and
- extends no further than is reasonably necessary to protect those interests.
When assessing a restrictive covenant, the court shall bear in mind the following factors:
- The geographical area and the length of time it shall run for. It is unlikely that a restrictive covenant with a wide geographical area or one lasting for a period of more than 6-12 months will be justifiable.
- The variety of activities seeking to be restricted.
- The interest seeking to be protected. A restrictive covenant must protect a legitimate business interest, such as client connections, and not purely to stop competition.
If you find yourself in this situation, you may be required to provide evidence to support a connection between your ex-employee and the information you are seeking to protect.
A one-size-fits-all policy is not appropriate when drafting a restrictive covenant as its contents will largely depend of your ex-employee’s role and their seniority in the business. To take such an approach would increase the risk of the clause being unenforceable. Further, covenants should be subject to a period of review to ensure their enforceability, as its reasonableness is judged at the time it was entered into.
If you need advice on restrictive covenants to ensure your business is fully protected, please get in touch, email email@example.com or call 020 7903 6888.
The material contained on this website contains general information only and does not constitute legal or other professional advice and should not be relied upon as such. While every care has been taken in the preparation of the information on this site, readers are advised to seek specific legal advice in relation to any decision or course of action.