Employee Restrictive Covenants FAQs

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Restrictive Covenants FAQs

What are post termination restrictive covenants?

Where a business wants to protect its interests if an employee leaves it can include post-termination restrictive covenants in its contracts of employment.  These clauses limit the actions of individuals when they leave their employment. 

Three commonly used types of restrictive covenants:

  1. Non-compete clauses: these clauses look to prevent the ex-employee from working for a competitor or starting their own competing business for a period following termination. The restricted period is typically 6 to 12 months.
  1. Non-solicit clauses: non-solicit clauses stop individuals from approaching clients, suppliers, contacts, customers or employees of their ex-employer to entice them away from them. These clauses most commonly apply for between 3 and 12 months.
  1. Non-dealing clauses: these aim to prohibit the ex-employee from dealing with clients, suppliers or customers of their ex-employer and will commonly apply for 3 to 12 months.

How do employers enforce post-termination restrictive covenants?

If an employer wants to enforce a restrictive covenant, they can apply to court for an injunction to stop their ex-employee from continuing to breach their contract of employment.  The court may then order the employee to stop doing what they’re doing to interfere with the employer’s business. 

But, restrictive covenants are not automatically enforceable. In fact, courts are quite reluctant to enforce them as they can be an unfair restraint on trade. If the employee doesn’t agree with the injunction, they can argue against it.  The court will then consider whether it should keep the injunction in place. 

Arguing about the enforceability of restrictive covenants is both time consuming and expensive, which in itself can be enough to persuade an employee to abide by them.

How will a court decide if a restrictive covenant is enforceable?

A court will only enforce a covenant if it believes the restriction is reasonable and protects a ‘legitimate business interest’.  To determine this court must first decide what the covenant means when properly construed. The court may cross out a word or two to make the covenant work, but it will not add in words or stretch their meaning. 

Once the court has decided what it thinks the covenant means, it will then go on to consider whether the employer has shown that they have a legitimate business interest which needs to be protected. If the court believes that the employer does have a legitimate interest to protect, it will then check to make sure that the covenant is no wider than is necessary for the protection of those interests. 

Finally, if the court decides that the restrictive covenant is reasonable, it will then have to decide whether it should exercise its discretion to grant the injunction.

Is it worth agreeing contractually to pay an ex-employee during a restricted period?

In some countries, post-termination restrictions are only enforceable if the employer pays the employee during the restricted period. So, should employers in the UK pay their ex-employee during their restricted period? 

A clear benefit of doing this is that it is likely to deter an individual from acting in breach of their covenants.  This is because they will lose their payments if they do breach their covenants and there is less financial pressure on them to do so because they still have an income. 

A further positive side effect is that the employer is likely to keep the length of the restricted period reasonable if they know that they have to pay the ex-employee during the restricted period.  They may even decide that the restrictions aren’t necessary at all.

On the downside, it will be expensive for an employer to protect their business.  For example, if they wish to have a 12 month non-compete clause, this could cost them 12 months’ pay.  In addition, just because a covenant is paid, doesn’t mean that it is automatically enforceable. 

A court can still look into a whether a restrictive covenant is reasonable and so the employer cannot escape the risk of legal costs.

Are there any alternatives to restrictive covenants?

The most common alternative is to put an employee on garden leave at the end of their employment.  During this period they will still be employed and be paid, but they typically won’t be allowed to visit the employer’s premises. 

The employee will also be prevented from contacting any employees, suppliers or clients of the employer. The employer can control the employee much more tightly as the employee is still employed by them and owes them a duty of fidelity, which means they must act in the employer’s best interests. 

Garden leave can only be imposed if the employment contract contains a garden leave clause, or the parties agree to a garden leave period.

As a further alternative, an employer may have some sort of deferred remuneration schemes such as a share option scheme.  In this type of situation, the employee will need to honour the terms of their contract of employment or lose the right to the deferred remuneration. 

How can we help protect your business?

We see a lot of badly drafted restrictive covenants that simply aren’t enforceable.

We can review your contracts of employment and advise you on the status of your current post termination restrictive covenants.  If they’re not as good as they could be, we can prepare fresh covenants for you and help you implement them to protect the interests of your business.

How can we help employees?

We see a lot of badly drafted restrictive covenants that simply aren’t enforceable.

Restrictive covenants are hard to enforce, but they are enforceable if they’re reasonable and protect your employer’s business. 

If you’re thinking about setting up a business of your own, we can advise you on what you can and can’t do, and how best to steer a path around any post-employment restrictive covenants that you may have.

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