Restrictive Covenants What Are The Rules?
Restrictive covenants what are the rules – The dos and don’ts
Restrictive covenants are one of the many ways that an employer can try to protect its business interests.
A restrictive covenant is a clause in a contract of employment which seeks to protect an employer’s business by restricting the activities of an employee after their employment has ended.
This could include preventing the employee from competing with their ex-employer for a period of time or stop them from dealing with their customers or clients.
Whether you want to work for a competitor, set up your own business or prevent an employee from doing so – understanding and getting restrictive covenants right from the outset is crucial. It’s a complex area but below are some initial points to consider.
Tips for employees – are you thinking of taking on a new role or setting up your own business?
• DO make sure you that you understand the scope and application of the restrictive covenants in your contract of employment – what do the defined terms mean and how long do the restrictions last?
• DO consider and take advice on whether the covenants are actually enforceable – a restrictive covenant that is too long in duration or too wide in scope is unlikely to be enforceable. This will depend on the nature of your role, the business you work for and the level of contact you have with key customers or clients.
• DO inform new employers of existing restrictive covenants with an ex-employer to avoid putting your new employer at risk of allegations that it has directly or indirectly breached these.
• DON’T ignore them – breaching restrictive covenants can be a serious matter and can result in legal action and be financially damaging.
Tips for employers – how can you protect your business?
• DO make sure your covenants are clearly and carefully drafted. For restrictive covenants to be enforceable you must be able to demonstrate that they protect a legitimate business interest and that they are reasonable.
• DO have a clear understanding of the interests you want to protect – consider the types of activity that could damage your business most if an employee left and only seek to restrict these. For example, stopping an ex-employee working in London when your company is based in Leeds is unlikely to cause harm to your business but will harm the ex-employee.
• DO review and update existing restrictive covenants when an employee is promoted to ensure they are still fit for purpose.
• DON’T ignore a new hire’s restrictive covenants with their ex-employer and monitor the new hire’s activities. If they are poaching former colleagues or customers and are prevented from doing so, this may expose your business to a risk of a claim that you induced their ex-employee to breach their restrictive covenants.