Protecting your business with restrictive covenants

The current climate means it’s crucial employers ensure employment contracts include the restrictions they need to protect confidential information, says Tabytha Cunningham

Credit: Artisteer/iStockphoto/Getty Images

In recent months we have seen an increase both in businesses looking to actively enforce restrictive covenants and exiting employees seeking advice on whether their covenants can be enforced against them.

The current economic climate is providing an additional challenge to organisations. With some being forced to consider redundancies and restructuring to streamline their business, many employees are now looking for opportunities elsewhere, including roles with competitors. It’s therefore crucial that employers ensure that their employment contracts include the restrictive covenants they need to protect their customer base and confidential information.

What are restrictive covenants? 

A restrictive covenant essentially restricts the action an employee can take when they leave their employment. There are many types, ranging from non-solicitation clauses, which prevent ex-employees from proactively contacting defined customers, to non-compete restrictions, which prevent former employees from working in a particular industry in competition with their ex-employer.

Are restrictive covenants always enforceable?

The starting point is that restrictive covenants are potentially void as a restraint of trade and as contrary to public policy, which generally provides that contractual clauses should not prevent individuals from making a living.

Employers can only enforce restrictive covenants if they can show they are in place to protect a specific legitimate business interest held by the employer and, crucially, that the restrictions go no further than is necessary to protect that interest.

There are several factors that are considered when deciding this test, for example:

  • the length of the restriction;

  • the geographical area they apply to;  

  • the activities the restriction covers; and

  • the interest the business wants to protect.

While it can be tempting to have a stock set of restrictive covenants for all employees, restrictive covenants should be tailored to the specific role to maximise their enforceability under this test. Generally speaking, more senior employees can do more damage if moving to a competitor, and therefore it is likely that stronger restrictions would be enforceable against them compared to a more junior employee.

The maximum length of restrictive covenants that the courts will usually enforce is 12 months, even when lengthy restrictions can be justified.

When should you introduce and review restrictive covenants?

Businesses without restrictive covenants in their contracts should consider introducing them for key roles – particularly those who rely on personal relationships with their customer base for repeat business.

Restrictive covenants will usually only be enforceable if consideration is given when they are introduced. At the start of the employment relationship, this is the job offer. When introducing covenants during employment, consideration could be in the form of a bonus, a pay rise or another benefit that is tied specifically to the new clauses.

Businesses should regularly review their restrictive covenants to check they remain fit for purpose. This is particularly important whenever a promotion is offered as the reasonableness of restrictive covenants is judged as at the date they are entered into. For example, if the sales director originally started in a junior role and their contract was never updated, the reasonableness of the restrictions will be judged against their original role.

What can you do if an employee breaches their restrictive covenants?

The first step will always be to review the restrictions and seek advice on their enforceability. The options are likely to include:

  • applying for an injunction for serious breaches causing substantial loss;

  • writing a letter before action to the employee (and, if appropriate, their new employer) highlighting the breach and requesting undertakings that they will cease acting in breach; and

  • bringing a breach of contract claim against the employee (and, if appropriate, their new employer).

At the same time, businesses should do as much as possible internally to protect the confidential information that the breach could affect and shore up their relationships with clients.

Tabytha Cunningham is an associate at Paris Smith