There have been a number of recent cases dealing with restrictive covenants and so we thought some guidance might be useful to help steer you through this complicated area.
Enforceable restrictive covenants can limit an employee’s ability to compete against their old employer once their employment has come to an end. However, the courts are generally reluctant to prevent former employees from earning a living and, at the same time, stifle competition by restricting a former employee’s activities.
The starting point is that all restrictive covenants are prima facie void. However, they are enforceable if they are no wider than is reasonably necessary to protect the employer’s legitimate commercial interests. If they are too wide then they are not going to be enforceable.
A common instruction
When it comes to restrictive covenants, employers often fall into two categories:
Firstly there are those who want very wide and/or very long covenants – often 12 months plus – covering a broad category of employees, including quite junior people.
Secondly there are those (possibly because they have had a bad experience in the past) who take the view that restrictive covenants never work – so they are not worth the effort.
The truth is that, with a little thought, it is possible to draft a sensible set of restrictive covenants which hit the right balance between protecting the employer’s legitimate interests and fair competition.
- Restrictive covenants should only be used for individuals and/or roles where there would be a real business risk were the employee to leave and then compete in some way. Covenants are not appropriate for junior employees or people in non-sensitive areas of the business. It is rarely necessary for all employees to be subject to a ‘blanket’ restrictive covenant. Indeed, including such ‘blanket’ terms may risk the covenant being less readily enforceable against those employees where there is a genuine business threat.
- The length of any restrictive covenant must be justified. Once the employment has ended the former employee may be keen to keep in touch with key contacts and will still be aware of commercially sensitive information. However, the value of this will diminish over time particularly once the employer has taken steps to ‘shore up’ its own relationship with key contacts, for example, by introducing a replacement. When the former employee has lost this initial advantage he should be free to compete in the market.
- The maximum enforceable duration of a restrictive covenant is unlikely to exceed 12 months for a very senior or key employee. In fast moving industries (such as IT) where the value of any initial advantage rapidly disappears 3 months may be appropriate. Overall, the current trend is for restrictive covenants to last for 3 to 6 months (although there are exceptions - see the recent cases referred to below). It is also necessary to factor in the ability to place the individual on garden leave (ie excluding the employee from work during their notice period) and ensure this is reflected in the overall length of the restrictive covenant. Garden leave can isolate the (soon to be) ex-employee from customers and suppliers and the employer has much more control over the employee’s activities. An option well worth considering.
- It is also worth remembering that if the extent and period of the restrictive covenant is reasonable, a former employee is more likely to honour it rather than risk a dispute. In practice it is relatively rare for disputes to be determined by the Courts. In any case where an employee is attempting to compete or a dispute has arisen, that employee is likely to take their own legal advice as to the enforceability of the covenants. If the restrictive covenants are properly drafted, the employee’s legal advice is likely to be that the covenants will be enforceable and that they should not risk litigating.
- Once an analysis has been carried out and approved at a senior level of the employer, restrictive covenants can be drawn up, issued to the relevant employees (either as a new contract of employment or a separate deed of trust and confidence (for which valuable consideration must be provided – not necessarily financial)) and signed. The analysis and the restrictive covenants should be reviewed at least every 2 years, and on any significant change to the employee’s role and/or the Company’s business focus, to ensure that they are still enforceable. If they are up-to-date a note to this effect should be made and the relevant employees informed. Otherwise new restrictive covenants should be issued.
12 Month Restrictions Can Be Enforceable
A managing director’s contract contained a restrictive covenant which ran for 12 months after termination of employment. It prevented him from entering similar employment in any place his employer had conducted business in the 12 months prior to termination. The director had been critically involved in all of his company’s major and strategic operational decisions and he had continued to have a recollection of major matters to a considerable level of detail. He had confidential information which the employer had a continuing interest to protect including new areas of business, acquisitions etc. For all these reasons the covenant was enforceable. Thomas v Farr plc  IRLR 419
Protection of Group Companies
Some covenants try to protect the business, not only of the employer company, but also other companies (subsidiary, parent etc). Generally a covenant cannot protect the separate business of other group companies. However, the Court of Appeal has recently treated a group, in effect as a single entity. In this case, the employee was employed by the holding company although the business was actually undertaken by a subsidiary. Beckett Investment Management Group v Hall 2007 IRLR 393
News for New Employers When Taking on Employees with Restrictive Covenants
When an employee joins a new employer in breach of their restrictive covenants with their previous employer, one possible remedy for the old employer is to bring a claim against the new employer for the tort of inducing the employee’s breach of contract.
The House of Lords has held that for an employer to be liable for inducing a breach of contract, it must deliberately (not just carelessly or negligently) induce the breach of contract. In other words the new employer must have deliberately set out to meddle with the contract. In certain circumstances that could include turning a blind eye to the obvious. Mainstream Properties Limited v Young 2007 IRLR 608
It is worth remembering that litigating in this area is an expensive business, costing thousands of pounds and a great deal of your time. Be realistic and protect what you need to protect. Take advice.