Your Restrictive Covenants are Unenforceable
Your business may be at risk if your restrictive covenants are unenforceable.
The Government consultation in respect of restrictive covenants (non-compete clauses) in employment contracts is due to come to an end on Tuesday 19th July 2016.
What is a restrictive covenant?
A restrictive covenant is a contractual clause or document, depending on how it is presented to the employee, which restricts the employee’s employment after termination with the current employer.
An employer would use this to protect its business by restricting the employee from contacting customers, identifying areas or competitors of which the former employee cannot work in/for. Plus, a restrictive covenant could prevent a former employee from setting up a business that competes with the employer and it could specify a period of time when these restrictions will be in force.
Termination of Employment
Employment can end for many reasons. However, fairly frequently, an employer needs to enforce the restrictions placed upon the employee when the employment relationship has broken down. Employers have to be careful not to act hastily in such circumstances and risk a breach of contract when bringing employment to an end; this could result in any restrictions in place becoming void.
Many employers specify clauses that are too wide and therefore unenforceable by the courts. Employers are quite often guilty of providing a generic restrictive covenant to employees rather than focusing on their role and what restrictions will be necessary to protect a legitimate business interest.
Are your current restrictive covenants unenforceable?
A recent case, Bartholemews Agri Food Ltd v Thornton, has highlighted how a restrictive covenant was grossly inappropriate for a junior employee. Mr Thornton left his employment with Bartholemews to join a competitor and the High Court did not enforce the restrictions in place because they were too wide to protect the business interests. The restrictions were also assessed when they were issued at the commencement of Mr Thornton’s employment, rather than when he was in a promoted role at the time of leaving.
Courts will balance the restrictive covenant(s) against the employee being able to earn a living; the interests need to be protected by the business and, of course, the public interest.
An example (which I have actually seen) was an employer who used clauses preventing employees from working for a period of 2 years and UK wide; such employers are just placing themselves at risk of wasting time and money. Clearly this restrictive covenant was unenforceable.
- Chances are your restrictive covenants are unenforceable.
- Identify what your legitimate business interest(s) is that you need to protect.
- Review your current restrictive covenants – identify any failings.
- Restrictive covenants should be issued at the start of employment; you cannot make an employee sign this once they have started work.
- When an employee takes a new role, consider if a restrictive covenant is necessary and, if so, make the offer conditional upon it being agreed and signed.
- Identify if you really need to use a restrictive covenant.
- Consider the role, level of seniority, and access to sensitive and confidential business information.
- A comprehensive confidentiality clause in the employment contract may be sufficient.
- If it is necessary for a restrictive covenant, make the clauses as tight as possible to increase the chance of them being enforceable – consider what clauses you need such as Non-Competition, Non-Solicitation, Non-Poaching, Non-Dealing etc.
- Ensure each restriction is separate so if one restriction is unenforceable, it does not make all of the others unenforceable too.
It is a costly practice to engage in court proceedings to enforce such restrictions. Therefore, it is essential that if a restrictive covenant is required, it is accurate and as watertight as possible.
Change ‘Your Restrictive Covenants are Unenforceable’ to ‘I am confident my restrictive covenants are as watertight as possible’.