Restrictive Covenants in Employment Contracts: Specialist Legal Guide

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.

In this article, Craig Hollingdrake, consultant solicitor at Richard Nelson LLP, provides expert insights into restrictive covenants in employment contracts. Discover what they are, how to draft them, and ways to enforce restrictive covenants – helping to safeguard your trade secrets and maintain a competitive edge.

If you’re interested in one particular section, use the links below to navigate straight to it:

• What is a restrictive covenant in an employment contract?
• Why do employers include restrictive covenants in employment contracts?
• Job roles that restrictive covenants could apply to
• Are restrictive covenants enforceable?
• What can happen if an employee breaks a restrictive covenant?
• Types of restrictive covenants in employment contracts
• Are restrictive covenants enforceable in post-employment termination?
• Nuances of restrictive covenants for employees
• How to implement restrictive covenants in employment contracts

Ready to talk about your organisation’s restrictive covenant? Contact our team today.

What is a restrictive covenant in an employment contract?

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, and forbid them from contacting clients or suppliers and ex-colleagues.

Going hand in hand with confidentiality clauses, 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.

Why do employers include restrictive covenants in employment contracts?

Employers include restrictive covenants in employment contracts to safeguard their business interests and protect valuable assets such as confidential information, client relationships, and intellectual property. 

These clauses aim to prevent employees from engaging in activities that could harm the company’s competitive advantage, such as soliciting clients or working for competitors after leaving the organisation. 

By setting clear boundaries on post-employment behaviour, employers can mitigate the risks associated with employee turnover and ensure the continuity of their business operations.

Roles that restrictive covenants could apply to

Restrictive covenants are commonly applied to certain job roles where employees have access to sensitive information, valuable client relationships, or strategic business assets. Here are some examples:

• Senior management: Executives and senior managers often possess insider knowledge, strategic plans, and client relationships critical to the company’s success. Restrictive covenants can prevent them from leveraging this information for personal gain or joining competitors immediately after departure.
• Sales and business development: Sales roles involve building and maintaining client relationships, making them susceptible to poaching by competitors. Restrictive covenants can protect the company’s client base by preventing departing employees from soliciting clients or working for competitors in similar roles.
• Research and development (R&D): Employees involved in research and development often work on proprietary technology or innovative projects crucial to the company’s competitive edge. Restrictive covenants can safeguard intellectual property and prevent employees from sharing confidential information with competitors.
• Consultants and contractors: Consultants may develop close relationships with clients and gain access to confidential information during their engagements. While non-competition covenants may not be common, other types of restrictive covenants can ensure consultants do not exploit these relationships or information for personal gain.
• Partners and LLP members: Partnerships may impose restrictions on departing partners to protect client relationships and prevent unfair competition. While the enforceability of these restrictions varies, they can help maintain stability within the partnership and protect its interests.
• Specialised roles: Certain specialised roles, such as those in finance, technology, or healthcare, may require additional protection due to the unique nature of the work and the potential impact of employee departures on business operations. Restrictive covenants tailored to these roles can mitigate risks and safeguard the company’s interests.

It’s essential for employers to carefully consider the nature of each role and the potential risks associated with employee departures when drafting and enforcing restrictive covenants. Tailoring these clauses to specific job roles ensures they are both effective and legally enforceable, protecting the company’s interests while respecting the rights of employees.

Are restrictive covenants enforceable?

In the UK, restrictive covenants are enforceable if they are reasonable and necessary to protect legitimate business interests. Courts will consider factors such as:

• the geographic scope,
• duration, 
• and specific restrictions imposed in the covenant. 

Poorly drafted covenants risk being unenforceable, as courts frown upon clauses deemed overly restrictive or in restraint of trade. Hence, restrictive covenants must be meticulously crafted, ensuring they’re both reasonable and limited in scope. 

For those presented with employment contracts containing restrictive covenants, seeking legal counsel is paramount. Doing so mitigates future risks and provides clarity on potential consequences should a breach of the restrictive covenant occur. An adept employment solicitor can navigate these complexities, offering invaluable insights tailored to your specific circumstances.

What can happen if an employee breaks a restrictive covenant?

When an employee breaches a restrictive covenant, various actions may be taken by the employer to address the breach:

Interim Injunction

If damages are deemed insufficient to remedy the breach, an interim injunction may be sought to prevent further violations. This temporary measure is intended to preserve the status quo until a full trial occurs.

Damages

Employers may pursue damages if financial compensation is deemed adequate. Damages are assessed based on the breach’s impact on the employer’s losses, with options such as an account of profits or negotiating damages considered.

Undertakings

The former employee can offer undertakings to observe the contractual restrictions pending a speedy trial. This option provides short-term protection for the employer and may lead to a settlement before trial.

Declaration

While rare, the court may issue a binding declaration regarding post-termination restrictions or an employee may seek a declaration of unreasonableness or unenforceability.

Action against third parties

Employers can take action against third parties benefiting from the breach, such as new employers or recipients of confidential information. Claims for inducing breach of contract or conspiracy may be pursued if the third party knowingly and intentionally induced the breach.

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 a few months to even years, depending on the business’ nature, the agreement in place and the 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.

Confidential information covenants

Confidential information covenants are vital components of employment contracts aimed at safeguarding proprietary knowledge, trade secrets, and sensitive data belonging to the employer. 

These clauses prohibit former employees from misusing or disclosing confidential information acquired during their employment, even after leaving the company. By preventing unauthorised disclosure or exploitation of proprietary information, confidential information covenants protect the company’s competitive advantage, intellectual property, and reputation. 

These restrictions serve to maintain trust and confidentiality within the employment relationship while preserving the integrity and security of the employer’s proprietary information.

Employment covenants

These restrictions prevent employees from being involved in the recruitment of employees from their former employer. Such clauses should be limited to colleagues with whom the employee had meaningful contact recently, aiming to prevent the unfair solicitation of key talent and protect the company’s workforce.

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 employee’s 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-employees 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.

A restrictive covenant 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 restrictive covenant 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.

Nuances of restrictive covenants for employees

Employment contracts often include restrictive covenants to protect a company’s interests after an employee leaves. Understanding these clauses is essential for both employers and employees to navigate the intricacies of employment agreements.

Can a restrictive covenant prevent an employee from working for a competitor for 12 months?

Whether a restrictive covenant can effectively prevent an employee from working for a competitor for 12 months depends on various factors. Typically, courts scrutinise the duration and scope of such clauses to ensure they are reasonable and necessary to protect the legitimate interests of the employer.

In many cases, enforcing a non-compete clause for a full year may pose challenges for employers. Courts often consider factors such as the nature of the employer’s business, the seniority of the employee, and the extent of access the employee has to confidential information.

For instance, if the employee holds a high-level position or has access to sensitive company data, a 12-month non-compete clause might be deemed reasonable to safeguard the employer’s interests. Conversely, for employees in less critical roles or with limited access to proprietary information, enforcing such a lengthy restriction may be viewed as overly restrictive and unjustifiable.

Ultimately, the enforceability of a 12-month non-compete clause hinges on the specific circumstances of each case and the balance struck between protecting the employer’s interests and allowing employees to pursue their livelihoods.

Gardening leave and the enforcement of restrictive covenants

Gardening leave, often coupled with restrictive covenants, is a strategic measure used by employers to safeguard their interests during an employee’s notice period. 

This provision keeps the departing employee away from work and client interaction, providing time for recruitment and allowing new hires to establish relationships with clients. Such clauses need to be included in employment contracts to be legally enforceable. 

Many contracts also stipulate that time spent on gardening leave reduces the duration of restrictive covenants, ensuring fairness to the departing employee while protecting the employer’s interests.

What grounds does an employee have to challenge a restrictive covenant in their contract?

Employees may challenge restrictive covenants in their contracts on various grounds, primarily focusing on the reasonableness and enforceability of such clauses.

Common arguments include asserting that the restrictions are overly broad or excessively long, thereby unreasonably limiting their ability to seek alternative employment. Employees may also contest restrictive covenants if they believe the terms are not necessary to protect the legitimate interests of the employer or if there has been a material change in circumstances since the agreement was made. 

Additionally, employees might challenge these clauses if they were entered into under duress, coercion, or without adequate consideration. Moreover, if the covenant unfairly restricts the employee’s ability to earn a livelihood without sufficient compensation or if it violates public policy, it may be subject to challenge. 

In essence, employees have grounds to challenge restrictive covenants if they believe the terms are unreasonable, unjust, or not in compliance with legal standards.

Can restrictive covenants apply on a TUPE transfer?

During Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) transfers, existing restrictive covenants continue to apply to employees moving to a new employer. 

However, the effectiveness of these covenants post-transfer may vary, posing challenges for the acquiring company. Tailored advice is essential to assess the relevance and enforceability of inherited covenants in alignment with the new entity’s objectives. 

By proactively addressing these considerations, businesses can mitigate risks and optimise the effectiveness of restrictive covenants in TUPE transfers.

Restrictive covenants in the context of PILON periods

Payment in Lieu of Notice (PILON) clauses in employment contracts allow for immediate termination by compensating employees for their notice period. If a contract includes a PILON clause, executing it does not breach contract terms, and post-termination restrictions, like restrictive covenants, remain enforceable. 

Without a PILON clause, written agreement from the employee is necessary, potentially incurring additional costs for full contractual benefits. Navigating PILON periods and restrictive covenants requires careful consideration to protect both employer and employee interests.

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 yet to include 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.

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

In our 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 ensure that covenants are tight and that employees have signed the employment and restrictive covenant 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 drafting or enforcing restrictive covenants.