What Are Restrictive Covenants in Employment Contracts?

As an employer, you hold certain information that is both invaluable and vitally important to the success of your company. So, you want it to be protected from former employees who may choose to use it for their advantage.

Including restrictive covenants in your employment contracts is a great way to ensure your business interests are fully protected. However, getting it wrong can lead to them being void and no longer legally binding.

In this guide, we'll discuss what restrictive covenants are, the different types, and what to do if an employee breaches them.

What is a restrictive covenant?

Restrictive covenants in employment are in place to restrict what an employee can do following termination of employment. This includes poaching of employees, customers, and clients.

In essence, they stop an ex-employee from being able to take advantage of what they already know about their employer's business.

Why are restrictive covenants included in employment contracts?

Restrictive covenants in employment contracts are vitally important to businesses. Having such clauses protect the employer's legitimate business interests, this includes:

• Protecting all customer connections and relationships with current clients. 
• Maintaining current supplier relations.
• Keeping the stability of the current workforce.
• Protecting trade connections and trade secrets.

If covenants aren't included, information that is of detriment to a previous employer can be used in the new employer's favour. Not using them in your employment contracts can have serious consequences and commercial implications in the future.

Are restrictive covenants legally binding?

Yes, restrictive covenants in employment contracts are legally binding if written correctly. If not drafted properly, then they lose the ability to be enforceable.

So as an employer, it's important to understand the different forms of covenants available.

Different types of post-termination restrictive covenants

There are many different types of restrictive covenants that you can use in your employment contracts. So you must become familiar with them before deciding which one to use.

Let's discuss each of them in more detail:

Confidential information

A confidential information clause will stop departing employees who have knowledge of confidential information from misusing or disclosing it. The leaking of which could lead to the employer's commercial interests being hampered.

Non-solicitation

Non-solicitation covenants aim to prevent an employee from contacting clients/customers of their former employer to use for their new employer. However, meaningful contact between the employee and the client must have taken place in the last six months for it to apply.

Although this isn’t a legal requirement, it can be drafted in a way to make it enforceable.

As well as this, it prevents them from persuading other employees to move with them to join their new employer.

Non-dealing

Non-dealing covenants are in place to prohibit former employees from entering into a contract between themselves and former clients. For this to apply, meaningful contact between the employee and the client must have been a recent occurrence.

This clause is in place even if the former employee doesn't make the initial contact.

Non-employment by clients

A non-employment clause works to prevent an employee from recruiting employees from their former employer. Restrictions must be limited to colleagues which the employee has had recent meaningful contact with.

Although this isn’t a legal requirement, it can be drafted in a way to make it enforceable.

Non-poaching

Non-poaching covenants are in place to prevent former employees from approaching their former colleagues to persuade them to join their new employer. For this to apply, recent meaningful contact must have taken place between the former employee and colleagues.

Although this isn’t a legal requirement, it can be drafted in a way to make it enforceable.

Non-compete

A non-compete clause stops an employee from working for one of your competitors or setting up their own business to compete.

However, this type of clause can be harder to enforce. This is because people typically want to stay working in the same industry in the same geographical area. In theory, there may be lots of competing businesses.

Disadvantages of restrictive covenants

There are a few negatives to inserting restrictive covenants in your employment contracts that you need to be aware of. For example:

• You may lose a talented prospective employee because they disagree with having clauses inserted.
• Having to enforce them may lead to conflict in the future.
• Trying to enforce them may incur heavy legal fees and unwanted stress.

Is a restrictive covenant enforceable?

Yes, however it's difficult to enforce post-employment restrictions. How enforceable a restriction is depends on the employee's position within their new employment.

Such covenants placed on senior employees are more likely to be enforceable than those forced on juniors. For example, having a substantial personal connection with a client.

Typically, if an employee has left your company for a senior role, you're in a better position legally.

What makes restrictive covenants enforceable?

You may choose to enforce a post-termination restriction when an employee or employees choose to leave your company. However, it's important to know when these clauses are considered to be enforceable.

Examples of this include:

• When the restriction lasts for a reasonable amount of time.
• When the restriction reflects the employee's role.
• If employees receive a benefit for accepting the restriction.
• If employees had access to confidential information or clients.

Are restrictive covenants valid during redundancy?

Yes, employers are entitled to introduce restrictive covenants on employees who are at risk of redundancy.

Just because the employee may not be needed to do the job anymore, doesn't mean the employer wants any confidential information being leaked. You may need to offer some benefits or payment for this information to stay confidential.

Can you enforce restrictive covenants if an employee is on garden leave?

Yes, you can. A garden leave clause in an employment contract allows an employer to ask an employee to stay away from the business for all of their notice period. During garden leave, the employee is no longer allowed to access your company's confidential information.

One of the main benefits of garden leave is the prevention of employees starting new employment.

Do employees have to accept restrictive covenants in their employment contract?

No, employees don't have a legal obligation to accept any employment contracts that include restrictive convenants. They can request a change to the clauses or the removal entirely.

Failure to agree may lead to you withdrawing the job offer. You must make it clear to your employees that if they start work and disagree with the clauses they must make you aware immediately in writing.

Can you add new covenants into your employment contracts?

If you're looking to introduce a new restrictive covenant into an employee's contract or change one, you must get agreement.

What to do if an employee breaches their restrictive covenants

A breach of post-termination restrictions could lead to the employer issuing legal proceedings against an ex-employee.

If you feel like a new employer has encouraged your former employee to breach a covenant, you can take legal action. They are more likely to have greater financial resources in which to pay an award, so it may be worthwhile.

However, to claim a financial remedy for the breach you must be able to prove it.

Examples of a breach of restrictive covenants include:

• A former employee setting up a competing business.
• A former employee joining a direct competitor.
• A former employee contacting a current employee to encourage them to join.

It's important to the strength of your case that your covenants in employment contracts are reasonable.

How to make sure restrictive covenants are reasonable

To ensure any clauses you insert into your contracts are reasonable, you must take great care. They must be drafted to protect a legitimate business interest and support the aim of your business. You may want to seek expert legal advice when drafting yours.

When investigating breaches, the following issues will be considered:

• How restrictive the clauses are to the former employee: Whether it is in place to intentionally prevent them from working due to the geographical area.
• If the clauses fully protect the business: If you can prove that having the clauses in place will protect your legitimate business interests.
• The former employee's role: If the clauses put in place matches the role of the employee. For example, more restrictions may be required for senior executives than at a junior level.

If the courts see the clause as unreasonable, it's void and can't be enforced.

Get expert advice on restrictive covenants with Peninsula

When running a business, you'll have certain information or client relationships that you want to protect. They may be key to the success of your company moving forwards.

So, as much as you trust your employees, you should have protections in place to ensure that information can't come back to haunt you in the future.

Including restrictive covenants are a great way to ensure your business interests are fully protected. However, getting it wrong can lead to them being void and no longer legally binding.

Peninsula offers 24/7 HR advice from employment lawyers which is available 365 days a year. We even provide a free employment contract template for you to download now. Want to find out more? Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.