Making restrictive covenants work for your organisation

How can these clauses be used in the workplace to safeguard company assets and client networks? Jonny Scholes and Sarah Bazaraa report

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Employment contracts are put in place for a specific reason: to provide protection for both employee and employer. Certain types of contractual clauses (restrictive covenants) can continue to govern an employee’s conduct even after the termination of their employment. They can prevent employees from carrying out particular acts, whether it’s soliciting clients or poaching former colleagues.

More often than not, the presence of such covenants can help to educate an employee about what is permitted after the termination of their contract and serve as a deterrent, which avoids any potential fallout. However, there are instances where relationships break down, covenants are breached and legal action is necessary. So, let’s look more closely at restrictive covenants and how businesses can make them work.

The power of restrictive covenants

In the current economic climate, the world of business is extremely competitive. Therefore, protecting significant company assets, such as client databases and confidential information, has never been more important. This is where restrictive covenants come into play. Carefully drafted clauses can safeguard against the risk of an employee moving to a competitor and taking with them valuable contacts and/or confidential information. While extremely useful, there are limitations. Get it wrong, and you run the risk of the covenants being struck out as being unenforceable and, therefore, leaving your business with little or no protection.

The key principles

The starting point when dealing with any type of restrictive covenant is that they’re not enforceable unless two boxes are ticked – first, the clauses must protect a legitimate business interest and, second, they must go no further than is necessary to do so.

It’s a fine balancing act between protecting an employer and not imposing too wide a restraint on an employee’s ability to work. To avoid being struck down as an unenforceable restraint of trade, organisations need to give careful thought to what business interest they are really trying to protect with the covenant and what they need to achieve that objective. 

When drafting restrictive covenants, it’s important to consider and to be precise about the activities that are being limited, the period of limitation and potentially the geographical extent of the restrictions. For example, if a business only trades in the south east and only has clients in that region, they may struggle to justify a covenant that seeks to extend a restriction across the whole of the UK.

Remember, whether the covenant is reasonable will be judged at the time it’s entered into and the burden will be on the employer to justify its reasonableness. 

Types of restrictive covenants

There are many types of restrictive covenants that can be included within an employment contract to protect different business interests and relationships. Some of the most common types are:

  • Non-compete – this prevents an employee from competing against a business for a defined period. Clauses that have the sole purpose of preventing competition are unlikely to be upheld in court, so it’s essential that there’s a legitimate interest to protect. For example, a non-compete covenant may be justified for a very senior manager who is in possession of trade secrets, which would be difficult to police through a confidentiality clause. 
  • Non-solicitation – employees can build close relationships with clients. The court recognises that those trade connections belong to the employer and deserve protection. Non-solicitation covenants prevent an ex-employee from contacting a client with a view to winning their business for a specified duration. 
  • Non-poaching of staff – the Court of Appeal has held that an employer has a ‘legitimate interest in maintaining a stable workforce’. However, when drafting such clauses, you should consider the duration and seniority of the employee this applies to. 

Dealing with a breach          

If you have any concerns that a former employee is breaching, or intends to breach, their covenant, the first step should always be to formally write to them to remind them of any restrictions they remain bound by.

If a breach does occur:

  • collate and preserve evidence, such as screenshots and deleted emails;
  • send a letter before action to the former employee;
  • write a letter to the new employer highlighting concerns over any alleged breach; and
  • if the matter persists, take steps to obtain an interim injunction from the court.

Ultimately, it’s about having adequate and enforceable protections in place if things go wrong after an employee has left the business. For employers to maximise their prospects in any potential dispute, the drafting of restrictive covenants should be approached with care and attention.

While companies often want covenants to be as wide as possible, the courts have shown time and again that this is the wrong approach. A more tailored strategy, which pays due regard to the balance between employee rights and the employer’s legitimate business interests, is more likely to succeed in the long run.

Jonny Scholes is a partner and Sarah Bazaraa an associate partner in the dispute resolution team at Pannone Corporate