Restrictive Covenants
What is a restrictive covenant?
A restrictive covenant is a clause contained within a contract of employment that is designed to restrict the activities of employees after the end of their employment with a company. The purpose of a restrictive covenant is to protect the employer’s legitimate business interests and a restrictive covenant will only be upheld where this is the case. In order to be enforceable any such restrictions that you wish to include in a contract need to be:
- agreed in writing with the employee;
- be reasonable and unambiguous; and
- be no wider in scope than is absolutely necessary to protect the interests of the business imposing them.
What are the different types of restrictive covenant?
There are three main types of restrictive covenant:
- non-solicitation;
- non-dealing; and
- non-competition.
In general the first two of these are easier to enforce than the third, and examples of non-solicitation and non-dealing clauses can be found in clause 16 of the REC model contract of employment.
Non-Solicitation and Non-Dealing Clauses
These prevent an ex-employee from actively contacting clients and candidates and or even enticing other current employees to go and work for their new employer. A typical clause of this nature would prevent the ex-employee from contacting, dealing with or accepting instructions from any client or candidate of your business with whom they had dealt, in the previous 6 months of their employment for a further period of 6 months after their employment ends.
The reasonableness of a restriction will be gauged in terms of its duration and categories of affected persons. In the context of employment agencies, the period of the restriction should be for no more than 12 months, and generally should be limited to a period of 6 months. The shorter the period of restriction, the more likely that the restriction will be upheld. It is sensible to state that the restrictions on soliciting clients etc. do not apply in respect of those clients, temps or applicants who are already registered with the competing business, and that the restriction only applies to clients, temps and applicants with whom the ex-employee dealt. A further refinement is to exclude clients, temps or applicants whom the employee brought with him or her from previous employment. The inclusion of these limits will increase the likelihood of a period longer than 6 months being upheld.
If a competing business encourages the ex-employee to hand over details of the client or candidate database that business may be liable to you for damages suffered for their inducement to the ex-employee to breach his/her contract.
Non-Competition Clauses
In the context of an employment agency or employment business it will usually be extremely difficult, if not impossible, to justify a restriction against an ex-employee working for or setting up a competing business even if this is expressed to be within a limited geographical area. The reason being that in most cases you can adequately protect your contacts with clients, applicants and temps by means of express non-solicitation clauses such as those referred to above. By adding non-competition clauses you are therefore going further than is necessary in order to protect your business contacts. This was the view expressed by the Court of Appeal in Office Angels -v- Rainer-Thomas where the Court refused to uphold a non-competition clause of 1,000 metres in the City of London on the grounds that it went further than the employer needed to protect their legitimate interests.
More recently such clauses have been upheld where it can be proven that non-solicitation or non-dealing clauses are ineffective but it remains extremely difficult to draft a reasonable clause as ‘reasonableness’ will depend upon the type of business you operate and the locality in which you operate and generally on all the surrounding circumstances. For example restricting an ex-employee who works in the financial services sector from competing within 1000 metres may be reasonable in the City of London whereas a restriction of two miles may be unnecessarily wide to protect your client base. The length of period chosen by you must relate to the damage likely to be suffered to the business in terms of loss of goodwill according to the seniority of employee concerned and type of market you operate in.
What are the remedies for a breach of a restrictive covenant?
Where a former employee has breached an express restrictive covenant in their contract of employment then there are two main remedies available to an employer:
- damages and
- injunctions.
To claim for damages the employer will need to demonstrate that the breach of contract by the ex-employee has led to a direct loss that the employer has suffered as a result of the breach. It can be difficult to prove what loss has occurred. Where a claim is made against the former employee as an individual, they may not have the financial means to meet an award of damages in its entirety and the employer will need to consider this before bringing a claim. It is possible to claim for damages against the new employer of the employee who has committed the breach if it can be demonstrated that the new employer intentionally induced the employee to breach their contract. Again, this would be difficult to prove without sufficient evidence.
An injunction is usually the best way for an employer can restrain the former employee or employee from breaching a restrictive covenant. Applications for injunctions should be made as soon as an employer becomes aware of a breach. An application can be made for an interlocutory injunction, which is a temporary order restraining the employee or former employee from acting in contravention of his or her contract of employment pending the full trial of the action. In emergency cases an application can be made to the court without notice to the employee or former employee, so the employer must make full and frank disclosure to the Court of all material facts, including those unfavourable to his case. If the application is granted the employee or former employee shall have an opportunity to apply to the Court to seek to have it discharged, once arguments have been heard from both sides.
In either case, a claim for a breach of a restrictive covenant must be brought within the limitation period for claims of this nature. This is 6 years from the date that the contractual term was been breached initially, and subsequent breaches of the same term will not reset this period.
What is breach of duty of confidence?
It is an implied term of an employment contract that neither past nor present employees may misuse confidential information belonging to their employers. However the scope of what is considered to be confidential diminishes after employment so it is also important to draft clear rules about confidentiality. An example of a suitable confidentiality provision can be found in clause 15 of the REC model contract of employment.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.