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Restrictive Covenants in Employment Contracts

14 Sep 2021

As a business owner and employer, it is important to protect your business trade secrets and confidential information from being passed over and used by a competitor. Drafting a restrictive covenant clause into employee employment contracts can prevent them from poaching your clients, suppliers and exposing your trade secrets.

What are restrictive covenants in employment contracts?

Restrictive covenants in employment contracts are clauses that limit your employees’ activities during the contract and post-employment termination. For example, restrictive covenants can limit former employees activities in a specific geographical area, forbid them from contacting clients or suppliers and ex-colleagues.

Restrictive covenants go hand in hand with confidentiality clauses; find out more in our article about confidentiality and trade secrets. 

Restrictive covenants can be incorporated into employment contracts to protect your business’s confidential information, current and prospective clients, suppliers and trade secrets after an employee leaves the company.

A restrictive clause can also prevent your employee from taking your clients, suppliers, their teams or any other contact gained whilst working in the company with them to their new job.

Common types of restrictive covenants in employment contracts

There are a few common types of restrictive clauses, which concern activities such as poaching, competition, dealing and solicitation. The duration of these clauses can range from few months to even years, depending on the business’ nature, agreement in place and leaver’s seniority.

Poaching covenants

These restrictive covenants are introduced into employment contracts to stop former employees from poaching their ex-colleagues and, therefore, causing even more damage to the company. It is crucial to implement a non-poaching clause in close-knit teams and industries, where the rest of the department could follow the leaving employee to their new workplace, for example, in R&D and banking teams.

Competition covenants

Competitor covenants restrain an ex-employee from working in a similar role for your competitor. These restrictions commonly last anywhere from a few weeks to a couple of months and are often implemented for employees in senior management positions.

Dealing and solicitation covenants

Dealing and solicitation covenants commonly restrain the leaving employee from contacting and working with your clients, suppliers and other contacts they might have gained whilst working with their ex-employer.

When the leaving employee has worked with a client for some time and built a strong working relationship, they could take advantage of the trust and their reputation in the client’s eyes and poach them to move their business to the leaving employee’s new workplace. However, implementing a tailored post-termination restrictive covenant clause in their employment contract can prevent client poaching.

How to implement restrictive covenants in employment contracts

We recommend implementing restrictive covenants in employee employment contracts when they first start working for your business. If you have not included restrictive clauses within the initial employment agreement, you can try to have the employee sign an updated copy of the contract. However, it is unlikely that the employee will accept restrictive clauses without some kind of compensation, like a salary increase. Furthermore, if the employee is forced to sign a new contract with restrictive clauses they don’t want to agree to, they could claim unfair dismissal and huge damages.

You as the employer can consider one option – if a junior member of staff is progressing within the business and needs a new contract to reflect the new role, it could be the right time to impose bespoke restrictive covenants in the updated employment agreement.

It can be a costly mistake to either fail to include these clauses or try to negotiate with your employee to add them to the contract during their employment. Therefore, in either of the scenarios, it’s a good idea to contact a solicitor to seek advice on drafting and implementing a tailored set of restrictive covenants for your business’s protection.

Are restrictive covenants enforceable in post-employment termination?

Restrictive covenants are enforceable post-employment termination for the agreed-upon time period.

When you have experienced a former employee breaching the restrictive clauses specified in their employment agreement, the usual course of action is to start by contacting your lawyer. With your lawyer, you can review the scope of damages caused by the breach of contract and decide on further steps, which may be to send the ex parte a letter referring to the restrictive covenant and banning them from speaking to more clients and claiming damaging costs.

Alternatively, you might agree with your solicitor that the best course of action is to seek injunctive proceedings so the issue can be resolved in court.

Validity of the restrictive clause

You need to protect yourself in case the former employee decides to challenge your claim. Therefore, when drafting the employment contract, it is crucial to consider the validity and scope of restrictive covenants so they can be enforced post-termination.

If the former employee challenges the post-termination restrictive covenants, you will need to justify the significance of these clauses to the business and explain what exactly these clauses aim to protect within the company.

It is essential to narrow down the specifics of what you are trying to protect, for instance, trade secrets, ex-employee’s activities in a specific geographical area or poaching clients and to what degree that would negatively impact your business. Restrictive clauses must be proportional and related to the ex-employee’s role and their direct contacts.

For example, imagine that you operate in Nottingham and have 100 clients and 100 employees. A sales team member is leaving. He works with five other team members and manages 5 of your company’s clients; the restrictive covenants would be out of scope if they forbid the former employee from contacting all employees, clients and suppliers across the country.

This example shows a very broad set of restrictive clauses, which the court could see as an attempt to strip the former employee of any chance to make a living. The courts have to try to balance both business objectives and the freedom of employees. Avoid expensive and time-consuming lawsuits that end up with the restrictive clauses being out of scope by consulting with a lawyer when drafting your employee’s employment agreement.

How can Richard Nelson LLP help you with restrictive covenants in employment contracts?

In my experience, the most successful cases are preventative. Success is most readily achieved when we are able to advise clients at the beginning of the process to make sure that covenants are tight and that employees have signed the agreement at the very start of their employment.

Our employment solicitors can guide you through preparing bespoke restrictive clauses for employees with different seniority levels and access to trade secrets to avoid clauses turning out to be unlawful.

Richard Nelson LLP has a team of experienced employment solicitors and can advise you on the right way of passage if you need to enforce restrictive covenants during post-employment termination or if your former employee has challenged the validity of the restrictive clauses.

Contact Richard Nelson LLP if you are involved in any aspect of the drafting or enforcing restrictive covenants.

Written by Craig Hollingdrake

Craig joined Richard Nelson LLP in 2021 as a consultant solicitor and provides a number of commercial law and employment services for businesses.Prior to joining Richard Nelson LLP, Craig worked as both a Managing Director and a Partner at successful law firms and partnered with businesses from SMEs to PLCs. Read more about Craig Hollingdrake.

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