Understanding restrictive covenants

Susan Doris-Obando outlines how best employers can use restrictive covenants while ensuring they remain enforceable 

Post-termination restrictive covenants are an invaluable tool for employers seeking to protect their confidential information. Such covenants include: non-compete, non-solicit of employees, non-solicit of clients, non-deal of clients and non-engagement of employees. 

A restrictive covenant will only be enforceable if it goes no further in scope than reasonably necessary to protect a legitimate interest (for example, confidential information, client connection or workforce stability). If it goes further, it should be rendered void and unenforceable as an unlawful restraint of trade. The onus of proof is on the employer. Enforceability is judged at the time the restrictive covenant is entered into. So when an employee is to be promoted, consideration should be given to amending the restrictions.

Restrictive covenants are considered more stringently in employment contracts than those in commercial contracts, due to the perceived inequality of bargaining power. In practice, 12 months is likely to be the maximum enforceable period of a restrictive covenant in an employment contract for senior employees.

Generally, non-engagement and non-compete restrictions are harder to enforce than non-deals and non-solicits. Non-competes will usually not be enforced if restrictions on soliciting or dealing with clients would be sufficient protection. There is no requirement in the UK for an employee to receive any remuneration during the period of non-compete.

Drafting is key. Restrictive covenants need to be tailor-made to the specific employee. Relevant questions include: does the non-solicit of employees carve out the more junior employees? Does the non-solicit and non-deal of clients only include those clients with whom the employee or their direct reports had contact over a specified look-back period? Does the non-compete refer to competing businesses and not competing entities? Is there a set-off for any time spent on garden leave?

How can restrictive covenants be enforced?

An employer can apply to the High Court for injunctive relief to enforce restrictive covenants and for damages, although court costs can often be prohibitive. Most restrictive covenant disputes are resolved in the pre-litigation phase. 

Due to increased globalisation and the internet-based nature of business, the international reach of restrictive covenants may need to be considered. Enforcement on an international basis is a complex area – an area set to become more difficult in a post-Brexit era. 

Can a new employer be held liable?

A new employer, hiring someone with restrictive covenants in favour of a former employer, may face injunctive action for inducing any breach of those restrictions by the employee. To strengthen such a claim, employment contracts often provide that restrictive covenant provisions should be brought to the attention of any prospective new employer. It is also common for former employers to notify a new employer of any restrictions directly.

There is a growing trend for employers to include a warranty in the employment contract that the employee is not aware of any legal restrictions preventing him or her working. A sensible new employer will nonetheless ask a prospective employee whether they are bound by any restrictions.

Team moves

Much litigation has centred on team moves. Strategy on such moves, whether acting as ‘poacher’ or ‘gamekeeper’, needs careful consideration. They often involve unlawful solicitation of employees by an employee (the ‘recruiting agent’) while currently employed (whether on garden leave or not) or in the period of a non-solicit restrictive covenant. The evidence in such cases can involve disclosure of lively communications on WhatsApp and by text. 

Anti-team move clauses are growing in popularity – restricting an employee's ability to join former colleagues. These are difficult to enforce.

What if an employee claims constructive dismissal?

If an employee is successful in claiming constructive dismissal (by accepting a fundamental breach of the employment contract bringing it to an end) then he or she is no longer bound by the post-termination restrictions. Courts give careful scrutiny to such claims in circumstances where the employee has new employment lined up or is moving as part of a team move.

What are the alternatives?

It is possible to address the threat posed by departing employees to some extent by notice provisions, during which time an employee may be required to spend time on garden leave. This is recognised as the best form of protection, as the employee will be bound by stringent employment obligations and will therefore be kept out of the hands of another employer. However, salary and benefits would need to be paid as usual during the notice period. Often an employer wants to cut ties quickly and exercise a pay in lieu of notice clause to immediately terminate the employment contract. Garden leave provisions would not be applicable in gross misconduct dismissals. 

An employee's duty not to misuse confidential information provides inadequate protection for an employer because it is often difficult to know what amounts to confidential information and whether a departing employee has actually taken it. Also, many senior employees may carry detailed confidential information in their heads.

Susan Doris-Obando is a barrister at Dentons