What are restrictive covenants in employment contracts?

What are restrictive covenants?

A restrictive covenant is a promise included in a contract of employment that generally restricts your employee from doing something.

They are clauses that are enforceable against your employee, even after they leave your employment.

When you hire employees, they’ll have access to some of your most valuable assets, contacts, and trade secrets.

While hopefully the people you hire will be trustworthy and loyal, even after they leave your business, it’s best to put some measures in place to prevent any of your hard work and business secrets being shared without your consent.

That’s why restrictive covenants should be written into your employment contracts from the outset so that what an employee can and can’t do during their term of employment and for a certain amount of time after leaving it, is clear and agreed.

Having it written down in contract form makes it enforceable in your favour, giving you the power to prevent (or at the very least to minimise) damage caused to you and even to seek compensation, where an employee breaks the terms of what you’ve both agreed.

It’s very important that you carefully assess your requirements and the particular employee role, so you can then consider, with expert assistance where necessary, the best wording to cover it.

It doesn’t matter what you call the clause.

It’s the precise wording that matters.

Anything too general risks being too broad to cover a particular problem when it arises.

Take it too far, however, and your intentions may end up being unenforceable as an unreasonable restraint on trade.

For example, imposing the restriction for an unreasonable length of time is very likely to make it unenforceable.

When are they allowed in a contract?

The law attempts to strike a balance between preventing restraint of trade on the one hand, and, on the other hand, allowing legitimate restrictive contractual terms in a contract of employment.

What’s permitted will depend on

1. Where you have a legitimate interest to protect; a general restriction against competition is not enough.
2. Your restriction must be reasonable and cover activity of the employee while he/she worked for you.
3. The time period must be reasonable; this will depend on the time you need to protect the goodwill of your business or limit the damage done by the employee.
4. The geographical area to be protected must be reasonable; it cannot be too wide if a lesser area is more than adequate to protect your business.

If you are in fundamental breach of a contract, or you repudiate the contract, you will be unable to rely on a restrictive covenant.

Restrictive covenant clauses

Let’s take a look at the different types of restrictive covenant clauses typically used and what protection they can give you.

When you’re considering adding restrictive covenants to an employment contract, you’ll need to ensure that any terms you use (like ‘Restricted Business’) are all properly explained as well.

The non-compete clause

Imagine this.

You’ve worked hard to build up a solid base of clients in your hairdressing business.

It hasn’t been easy, but you began to see the fruits of your hard work, long hours and commitment pay off.

In fact, it got so busy that you had to take on another hairdresser.

You take on Paul, who is originally from the area and has spent the last 5 years working in one of the country’s top hair salons.

You agreed the main parts of his employment contract – his salary and working hours – and things have gone surprisingly smoothly.

You didn’t give him a written contract because you were both happy enough.

You noticed that he got on great with all your clients and they really liked him.

Last weekend, though, you heard some disturbing news; you were told that Paul was going to set up his own salon on the Main Street in your town.

Paul confirms your worst fears and gives you a month’s notice.

You quickly realise that the most serious aspect of this whole affair is Paul setting up his new competing business on Main Street, and the danger of you losing a lot of your clients – clients you have spent years acquiring.

You now know that if you had a written contract in place from the start you could have protected yourself and your business with a non-compete clause.

Such a clause would prevent Paul from either starting his own business or joining a business that’s in direct competition with yours, for a certain amount of time and within a specific geographical area.

Here’s some example wording for a non-compete clause:

‘You agree that you will not within [x] years of termination of this contract directly or indirectly, advise, instruct, do or assist in any activity the effect of which is to promote the sale of any product or service which competes with any business or business activity (‘Restricted Business’) of the Company within a geographic radius of [x] miles (the Restricted Area) for a period of [x] months immediately after the termination date.

A good contract will include explanations about how the various terms in the above example clause should be interpreted, for example, ‘Restricted Business’ (which describes the business activities and/or entities that you want to prevent the employee from being involved in or with), and ‘Restricted Area’ (which sets a geographical boundary to the constraint you’re imposing.

A period of 6 months would generally be considered a reasonable restrictive period.

You may be able to justify a longer period, especially for more senior members of staff in, for example, sales, business development and marketing roles.

For these roles, you might look to impose a period of 12 months, including any period of notice within the contract.

A CEO role might even warrant a longer period of restriction.

Senior members of staff carry huge amounts of valuable data around with them; being unable to enforce a non-compete clause against them could have a very substantial impact on your business growth.

The non-solicitation clause

A non-solicitation clause prevents an ex-employee from approaching your customers for business after an ex-employee leaves their employment with you.

Here’s some example wording for a non-solicitation clause:

‘You agree that you will not within [X] months of termination of your contract, solicit or endeavour to entice away from the Company the business or custom of a customer with a view to providing goods or services to that customer in competition with the Company.’

A period of 6 months would generally be considered a reasonable restrictive period for this type of contractual constraint too.

You may be able to justify a longer period, especially for more senior positions within the business (9 months in addition to a 3-month notice period is not unusual for directors, for example).

But what’s reasonable and enforceable will depend on the particular circumstances of your business and client relationships.

Ultimately, there’s no point imposing restrictions that won’t be enforceable and an expert will be able to evaluate your particular circumstances to advise you how far you can set the reach of your preferred restriction.

The non-dealing clause

This type of restriction builds on the protection provided by non-solicitation clauses.

It prevents your ex-employee from working with one of your clients, even if they are approached by the client themselves.

Here’s some example wording for a non-dealing clause:

‘You agree that you will not within [X] months of termination of your contract, be involved with the provision of goods or services to (or otherwise having business dealings with) any customer in the course of any business concern which is in competition with the Company.’

‘You agree that at any time after termination you will not represent yourself as connected with the Company, in any Capacity, other than as a former employee, or use any registered business names or trading names associated with the Company.’

This is an area where the length of the restriction may quickly cause problems with enforceability, so it’s worth taking advice on what would be a reasonable length of time for your particular business circumstances.

A period of 6 months would generally be considered a reasonable restrictive period; you may be able to justify a longer period, depending on the particular circumstances of your business and client relationships and the nature of the role that the employee holds.

The no poaching (or non-solicitation) clause

This clause prevents the ex-employee from encouraging your current employees to leave with them in order to set up a new business or start work at a new company together.

Here’s some example wording for a non-poaching solicitation clause:

‘You agree that you will not within [x] months of termination of your contract, in the course of any business concern which is in competition with any Restricted Business, offer to employ, engage, advise, instruct, do or assist in any activity the effect of which is to encourage any person to breach or terminate any contract between that person and the Company, including a contract of employment.’

A non-employment clause

A related restriction that you could also include is what’s called a ‘non-employment clause’.

This takes the non-solicitation restriction even further and obliges an outward-going employee (usually those in the more senior company positions), not to later employ anyone identified as a ‘Restricted Person’ during a defined restrictive time period.

An example of a non-employment clause would be:

‘You agree that you will not within [X] months of termination of your contract, employ or provide work to any person who is or was employed by or who worked as a contractor for the Company within the period of [X] months immediately after the termination date.’

The law entitles employers to protect their legitimate business interests and these interests include having a stable workforce.

Again, the duration of the restriction will have a bearing on its enforceability.

Don’t make these periods too long, however tempting it may be to do so.

Generally, 3–6 months is considered reasonable, but your particular circumstances might exceptionally justify a longer period of restriction, especially for more senior roles within your business.

Of course, you can’t force any employee to remain with you if they want to leave and have decided to do so.

What you can do, is to look for evidence that one or more additional employees were cajoled into leaving by an ex-employee and if you have the protection of the no-poach clause, you can take action against that ex-employee.

The non-employment clause would give you the ability to prevent the employment of that employee, however.

This is typically the controversial and it would always be wise to take expert advice before you seek to enforce it.

You need good justification…

When adding restrictive covenants into your agreements, make sure that you’ll be able to show how each one gives you a reasonable and necessary protection, as well as how reasonable they are in terms of duration and geographical span.

What makes a restrictive covenant unenforceable?

Ultimately, you must be able to show that the restrictions are a reasonable restraint of trade.

They go no further than reasonably necessary to protect your legitimate business interests.

So, when might restrictive covenants be unreasonable?

• If  your restrictions are overly onerous i.e. in terms of time or compared to restrictions for more senior staff
• If the geographical area is too wide
• If the duration of non-compete clause is out of keeping with the length of time the employee was with you. 

Four points to consider when drafting your restrictive covenants:

1. Brief explanation (1 sentence) of how the restrictive covenant is designed to protect your business
2. How long your ex-employee would be expected to adhere by the restrictive covenant after leaving your business
3. The geographical area that applies
4. Any definitions, e.g. ‘client’, ‘assets’, etc. should be very specific to avoid confusion or lack of clarity. 

Our template clauses and contract templates provide a robust starting point for you.

But you must apply them to the particular environment in which your business operates and the nature of the role that each employee will play.

More senior roles and/or those with a lot of customer or strategic exposure may warrant (and justify) greater restriction than others.

What if an ex-employee breaches a restrictive covenant?

The first thing you should do is prevent the breach from causing more damage than it may have already.

The fastest way to do successfully is this is to take rapid advice from an expert.

You may not want to notify the employee that you are aware of their breach of contract until you have done so – tempting though that may be.

There could be circumstances where you might need more evidence, or you might want to engage a bit of data/forensic assistance to be very sure of the facts.

Get in touch with an expert as soon as possible if you’re in this position.

Ultimately, our legal experts may recommend getting you an injunction (an emergency order from the court) that orders the ex-employee to put an immediate stop to their actions.

But you may be able to achieve the same outcome by less dramatic and costly means – which is where our experts will always focus their efforts for you first.

Many situations do not end up in court or with court orders.

More often, the threat of such action, backed up by clear evidence of wrong-doing and clear contractual terms indicating that the restriction is enforceable, is sufficient to bring the ex-employee’s unlawful actions to a halt.

If you do go to court and win your case, you may be able to get compensation for any damage that has occurred to your business as a result of the ex-employee’s efforts.

The court order may also include an obligation on the ex-employee to return or remove any confidential information that they currently have.

To find out more about restrictive covenants you may find this video helpful