How to make restrictive covenants work for your business
Restrictive covenants are most commonly used to set conditions on when and where employees can work after they leave your employment, and how they use the contacts and knowledge they gain in their role. But not every restrictive covenant is applicable, or even possible, in every situation.
Where a court rejects a restrictive covenant, it’s usually because they’re badly worded or they try to impose restrictions that aren’t necessary for that individual.
Restrictive covenants shouldn’t be used in a generic way like other contract terms regularly are. The internet has plenty of impressive-looking clauses freely available for use in contracts, but you need to be wary – they should be tailored to the business and the employee concerned, otherwise they’re likely to be worthless.
Restrictive covenants can’t be used merely to prevent competition. They have to protect the employer’s ‘legitimate business interests’, which normally means its confidential information, its customer connections or the stability of its workforce. Also, a covenant must go no further than is reasonably necessary to protect those interests.
Often, the employer will be adequately protected by restrictions that prohibit the misuse of its confidential information and prevent the former employee from soliciting or dealing with particular customers for a limited period, and a ‘non-compete’ restriction against working for competitors would be unreasonable. However, the courts sometimes recognise that the only way the business can effectively protect its legitimate interests is to stop the individual from working for a competitor for a short time.
In some countries, an employer has to pay a departing employee for the duration of their non-compete restriction period if it wants to prevent them from working elsewhere, but this isn’t a requirement under English law – unless it’s part of the employee’s contractual arrangements, which would be unusual.
Putting an employee on garden leave during their notice period can be an effective way of protecting the business, but you might still want them to carry on working up to their leaving date. It’s therefore better to have the option of using restrictive covenants alongside garden leave.
If an employer decides to place the employee on garden leave as provided for in their contract, the employer can still enforce their post-termination restrictions, although the contract might stipulate that any time spent on garden leave has to be deducted from the length of the restrictions – so that if, for example, the employee has a restriction against soliciting clients for nine months after leaving, and they were on garden leave for three months, the restriction will last for six months from the termination date.
Not all contracts contain such set-off provisions, and there is no rule that they have to, but it’s good practice to include one when putting new terms in place – otherwise a court might decide the combined period of garden leave and the restrictions is too long, and say the restrictions are unenforceable as a result.
Employer’s breach of contract
The employer will not be able to enforce the departing employee’s restrictive covenants if it has committed a serious breach of the employee’s contract (a ‘repudiatory breach’). An example of this is where the employer terminates the employment without notice and makes a payment in lieu when there is no contractual right to do so. Even though the employee has been paid everything they were owed for the notice period, the employer will be prevented from enforcing their post-termination restrictions.
Rewriting bad restrictions
The court can sometimes remove parts of a restrictive covenant, where those parts would have prevented it from being enforceable (known as ‘blue pencilling’). However, there is limited scope for this, and the court can’t rewrite a restriction that was badly drafted in the first place. For example, if the court thinks a 24-month restriction against soliciting customers is unreasonable in the circumstances, but it would have allowed the same restriction if it only lasted for six months, it can’t simply replace the 24 months with six months and enforce the restriction.
Injunctions against former employees
It’s important to act quickly when you become aware of a possible breach of a restrictive covenant, or you might lose the chance to obtain an effective remedy.
For example: one of your top salespeople joined a competitor four months ago and she has a six-month non-compete restriction. You haven’t done anything about it yet as you weren’t too bothered at first, but now you’re losing a lot of business to them so you want to go in hard and get an injunction to stop her working there for the next two months.
Here, a court is unlikely to grant an injunction after such a delay and with only a relatively short part of the restricted period remaining, even if the non-compete restriction is enforceable. You could still have a claim for damages for breach of contract, but it can be difficult to prove what loss has been caused by the employee’s breach – which is why injunctions are often sought, and granted, in the first place.
David Fisher is a partner at CM Murray