Restrictive Covenants

Last year the UK government launched a "call for evidence" on non-compete clauses, as part of a drive to boost innovation. The government says it is concerned that the use of restrictive covenants in the UK may hamper the movement of talented staff, stifle innovation and hinder business start-ups. It refers to research in the US suggesting that limiting the use of these clauses has had a positive impact. One prominent think tank here has already called for the government to consider banning non-compete clauses in employment contracts.

Although UK employers do not have to pay employees compensation during periods of post-termination restraint, enforceability can be something of a challenge. Under established UK case law, in order to enforce a covenant an employer has to demonstrate to a court's satisfaction that it has a legitimate business interest to protect and that it

  • is designed to protect the firm’s legitimate business interests;
  • extends no further than is reasonably necessary to protect those interests;
  • is designed to preserve customer connections that an employee has developed while working for the employer – to allow a period of time for another employee to consolidate the customer relationship;
  • is designed (for non-poaching clauses) to preserve the stability of the workforce after key employees have left.

In addition to the legitimate business interest, the covenant must go no further than is reasonably necessary to protect that interest, particularly in regard to the nature of an employee's role. This relates to both the type of restrictions imposed, and their width and duration.  For example, you might expect to see a restrictive covenant attached to the contract of an Account Executive, who has regular and detailed contact and knowledge of the customer’s business, but not for an Account Handler who may have little or no contact with the customer.  Validity is therefore very fact specific – both in terms of the precise scope of the restrictions and the nature of the particular job. It os important to remember that reasonableness is judged at the time that the restriction is entered into, not at the point of enforcement. So, covenants may need reviewing from time to time in order to ensure that they remain enforceable in relation to the role.  This means, for example, that it is not possible for an employer to introduce covenants into contracts where there is no legitimate business interest to protect, in the hope that they might be enforceable at a later date.

Importantly, for a restrictive covenant to be enforced it must not be drafted too widely. It will be for the employer, in the event of a clause being challenged, to show that the clause is justified and sufficiently narrow. To meet these criteria an employer must consider certain factors:

  • The breadth of the geographical area of any restriction and the length of time of the post termination restriction must be justified. It is unlikely that a wide geographical area will be justified and, generally, a restriction for more than 6-12 months will be difficult to justify;
  • The type of the activities that the employer is trying to restrict;
  • The type of interest being protected, for instance, information such as trade secrets may be granted wider protection than customer information, given that its potential use across wider markets.

The review isn’t looking at confidentiality clauses – the government seems to think that employers should be able to rely on these protections instead of using non-compete clauses. However, a confidentiality clause may not constitute adequate protection.  It is often difficult to distinguish between information that is confidential and information which forms part of an employee's skill and knowledge (which can be used freely after termination of employment).

We frequently see restrictive covenants that look impressive, but when they are analysed they offer little or no protection, generally because they have not been constructed specifically for the role they relate to.  Unfortunately, this often doesn’t become apparent until an employee leaves the company.

An employer needs to be aware that gathering evidence may be key: emails, telephone logs (and the requisite policies to ensure that these can be obtained) should be the first step in protection when a key employee leaves.  Additionally, communicating to the new employer that there is a restrictive covenant in place and that you will pursue it if necessary is equally important.

If you have any questions about restrictive covenants or would like help drafting your employment contracts then please do drop me a line.

About the author

Kate is the chairman and co-founder of RWA and has worked for the company for nearly 20 years. She is a fan of developing practical, workable, business-led policies and procedures. Kate has specialist training experience within the financial services sector, including major general insurers, and the Lloyd’s underwriting and broking market. She has researched and developed numerous training programmes, both for commercial and in-house use. She has extensive experience of developing in-house and public training programmes for business skills, including Diversity, Employment Law, Management and Leadership, Motivation, Coaching and Feedback, Communication Skills and EQ.

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