Restrictive covenants are widely used in the modern employment relationship as they essentially serve to protect the employer’s commercial interests in the event that the employee ceases working for the company. Such covenants are commonly used to prevent an ex-employee from working in competition or from poaching customers. However, such agreements need to be carefully drafted; if not, then they will be invalid. In this article we examine a recent case where the High Court has ruled such an agreement to be invalid, leaving the employer unprotected. What is a Restrictive Covenant? A restrictive covenant is a document that employers ask employees to sign as part of their contractual paperwork which places restrictions on the business activities of the employee once their current employment ends. It need not only be introduced at the start of employment – it may be introduced part way through employment with consultation and agreement with the employee. They are put in place mainly to safeguard the employer’s interests in terms of protecting the sensitive information that the employee would have been privy to as part of his/her job which is integral to the employer’s company. Such information is considered invaluable to the success of the company and employers often want to take measures to prevent that information being used to their effective detriment by individuals once they are no longer employed by them. Areas that are usually offered such protection in a restrictive covenant are the industry knowledge gained by the employee whilst with the employer; the current client base, any prospective clients and also current employees. Reasonableness Employers do not have free will to construct restrictive covenants as they wish. In order for a restrictive covenant to be valid in the courts, it must be considered to be reasonable and as such cannot place a blanket or unreasonable restriction on the employee’s future employment. The time period and/or the geographical radius within which the restrictions are placed must not be unrealistically wide and therefore each employer should consider carefully the parameters they will include taking into consideration where in Ireland they are situated and their particular industry. As an example, let’s consider the below fictional restrictive covenant which a hairdresser who is solely based in Cork City issues to one of their stylists: “The stylists agrees with the company that, for a period of three calendar years following termination of their employment, they will not be employed in the capacity of a stylist by any business located in the province of Munster.” A court will most definitely strike down this covenant as being unreasonable as firstly 3 years is too long for any person to not be able to work within their local area. Furthermore, if the hairdresser’s clientele is solely based in the Cork City region then there is no reason why the employee could not work elsewhere in province of Munster. Thus, the advice is simple: make sure any covenant you introduce is tailored specifically to your business needs and ensure that it does not go any further than is reasonably necessary to protect those needs. Levinwick Limited -v- Hollingsworth [2014] IEHC 333 This case concerned an employee who worked as a Pharmacy Manager for the employer. The employee’s contract contained a clause in which he agreed not to do similar work in another pharmacy within a two mile radius of the employer’s pharmacy. The clause included the following restriction: “You undertake that during the term of your employment but for a period of 24 months after the termination of your employment, for any reason, you will not be employed or engaged by, do locum work, manage, own or part-own, a pharmacy or other retail business …within a two-mile radius of the Pharmacy….” After the employment relationship had ended, the now ex-employee sought to take up work in a different pharmacy within a two mile radius of the ex-employer’s pharmacy. The ex-employer sought to restrain the ex-employee from doing so. Enforceability The issue that arose in this case was the enforceability of this covenant. As noted above, such covenants are generally deemed unenforceable at common law as the courts wish to promote competition. They are, however, enforceable if the covenant:
- Protects a legitimate business interest
- Goes no further than is reasonably necessary to protect that interest
The ex-employer argued that restricting the ex-employee working in the other pharmacy was reasonable and for the purpose of protecting a legitimate business interest in that the ex-employee was “the face” of his pharmacy and that he was concerned that customers would follow him to the other pharmacy. Indeed, the ex-employer stated that the business had suffered a decline in business after the departure of the ex-employee. Unreasonable The High Court disagreed with the ex-employer and in making this decision the Court took into account the following factors:
- It was held that the evidence fell a long way short of establishing that the defendant represented “the face” of the ex-employer’s pharmacy while he worked there and that he was identified by customers as such. In making his decision, the judge took into account that there were a substantial number of employees, including two Pharmacists and two locum Pharmacists to cover weekends. The court also took into account that the ex-employee, as Pharmacy Manger, had a considerable number of administrative duties relating to the pharmacy which required him to spend a considerable amount of time in an office on the premises and not interacting with customers.
- Evidence showed that the pharmacy has been in a state of decline for two years prior to the Pharmacy Manager leaving the business and thus the decline could not be attributable to his departure to a rival pharmacy.
Conclusion Overall, the High Court held that the pharmacy could not establish that they had a legitimate business interest that required protection in this set of circumstances and as a result the ex-employee was free to take up employment with the rival pharmacy. As such, the pharmacy could not pass step one of the two part test cited above. Even if the pharmacy could have established a legitimate business interest and got passed step one it is likely that the covenant would have fallen foul of step two in that the Court would most likely have deemed the fact it applied for 24 months to be unreasonable. Employers are encouraged to scrutinise closely the necessity of any restrictive covenant in protecting a business interest and ensuring that the covenant is reasonable for both the employer and employee in such circumstances. As this case shows, just because an employee signs a restrictive covenant does not mean that they will be bound by it. The key piece of advice for employers in this respect is that going too far will likely mean that the covenant will be entirely void, leaving the employer entirely exposed. As such, guaranteeing a little protection is better than hoping for a lot of protection. Employers are encouraged to see advice on restrictive covenants from the 24 Hour Peninsula Advice Service on 01 855 50 50.
