Employment contract disputes – restrictive covenants

Restrictive covenants are contractual clauses that place a constraint on the way an employee can behave with respect to certain aspects of his or her job.  Although a contract of employment may have come to an end, the restrictive covenants will often continue in force, ensuring that an employee cannot set up in competition with the company that they have just left.  These types of clauses are often particularly restrictive where it is a senior employee who has left, or is leaving, or someone who has been involved in key decision making processes of a business and has been party to important information.  Restrictive covenants can affect both the way an ex-employee can behave after he or she has left a position, as well as any new contracts of employment that employee might want to enter into.

An enforceable restrictive covenant

A restrictive covenant should go no further than is required to protect the legitimate business needs of the employer’s company – for example, to look after client contacts, trade networks or workforce stability.  If the clause does go too far it could be viewed as an unlawful restraint of trade.  To be enforceable a restrictive covenant will need to be ‘reasonably limited’ in time and geography, as well as not going further than is necessary to protect the legitimate business interests of the employer.  All of these types of clauses are drafted differently and whether or not they are enforceable will depend on this drafting.

Types of restrictive covenants

Restrictive covenants will usually come into play in several different areas: a) as a duty to keep confidential trade secrets or confidential information, such as customer details; b) as a duty not to get in touch with clients or customers of the ex employer to try and do business with them (non-solicitation); c) as a duty not to deal with clients or customers of the ex employer even if there has been no solicitation (non-dealing); d) as a duty not to set up in competition or work for a competitor (non compete); or e) as a duty not to take staff with you (non-poaching).

Disputes over restrictive covenants

Where disputes arise over restrictive covenants, if these cannot be resolved by arbitration, then they tend to end up in the Courts.  On the whole, where a restrictive covenant is overly onerous, the Courts have not seemed willing to allow such a covenant to be enforceable.

The exception is non-compete clauses, where the Courts have come down on the side of employers who want to impose these clauses against senior employees for up to 12 months – as long as the clause is not widely drafted, there is no adequate protection provided by non-solicitation and confidentiality provisions and, because of his or her seniority, an employee would be more of a risk to his or her ex employer if they competed with them.  As a result, there is the potential for senior employees to find that in any future disputes, restrictive covenants against them of this type are held enforceable.  Whilst a court will not rewrite a clause to make it enforceable, there is the potential for the court to ‘blue pencil’ (i.e. remove) a part of a restrictive covenant that is too widely drafted to leave the reasonable part of the clause to remain.

Breach of restrictive covenants

Employers can take a number of steps against employees who fall foul of their restrictive covenants, both financial and non financial.

An injunction can be used by an employer to stop an employee breaking the restrictive covenant terms of the contract and from working for a new employer.  If the injunction is successful the ex-employee may have to pay the costs of obtaining the injunction.  Another option is a springboard injunction to avert an ex employer suffering serious economic loss as a result of an ex employee benefitting from breaching their contract, for example where confidential information is used to benefit the business of a competitor. An ex-employee could also be ordered to ‘deliver up’ any documents he or she has that could be used by a competitor – for example, customer lists.

Financial action includes suing the ex-employee for damages for any loss that results from breaking the restrictive covenant contractual terms, as well as applying for an account of profits – for example an account of profits from an ex-employee’s new employer where that employer has benefitted from confidential information after the ex-employee broke a non compete clause and joined the competitor employer.

‘Garden leave’ can be used by employers to protect customer networks and information databases by not allowing an employee to come to work as normal before the end of his or her contract.  During the leave, the employee receives pay and benefits as usual and still owes a duty of trust and confidence to an employer but remains away from the office and the company’s clients.