With the number of job vacancies at a record high and skill shortages allowing employees to switch jobs easily to achieve the work/life balance they desire, employers need the legal tools to protect their commercial interests more than ever.
To protect their commercial interests, employers can use remedies such as restrictive covenants. Including restrictive covenants in Employment Contracts allows you to curb the ability of highly skilled ex-employees (or senior employees), to work for a competitor, set up a rival business, or poach your customers and/or staff. In this article, our employment lawyers explain everything you need to know about restrictive covenants.
What is a restrictive covenant in employment law?
A restrictive covenant is a clause in an Employment Contract stating that an employee is prohibited from competing with their employer and/or cannot solicit or deal with the employer’s customers for a certain period after leaving their employment. They are most often used to prevent highly-skilled ex-employees or senior managers who, over the course of their employment with a particular organisation, have built up strong relationships with the customers and suppliers of that business.
Are employment restrictive covenants enforceable?
Although employees who have resigned are often well-placed to take advantage of confidential information, strategic plans, customer and client details, or other information about their employer's business, the doctrine of restraint of trade states that a person must be free to work in their trade and use their skills to make a living without undue interference.
A covenant that restricts an employee from being free to work in their trade is, therefore, on face value, invalid unless it is designed to protect legitimate business interests and no wider than reasonably necessary.
What can I do to ensure the Employment Tribunal deems a restrictive covenant as fair and reasonable?
The Employment Tribunal will apply the following fundamental principles when assessing whether or not to enforce a restrictive covenant on the grounds that it is fair:
- The restrictive covenant must protect the employer’s legitimate interests (examples of legitimate interest include trade and supplier connections, existing employees, and confidential information), the courts never uphold restrictive covenants designed only to prevent competition
- The restrictive covenant “must afford no more than adequate protection to the benefit of the party in whose favour it is imposed"
- At the time the employment contract was entered into, the restrictive covenant must have been reasonable
To ensure any covenant you include in your Employment Contracts will be enforced by the Employment Tribunal, speak to one of our experienced employment law solicitors. They will be able to advise you and draft the necessary clause/s.
What are the different types of employee restrictive covenants?
The most common types of restrictive covenants include:
- Non-competition covenants – prevent the ex-employee from working for a competing business
- Non-solicitation covenants – prevent the ex-employee from soliciting your existing clients.
- Non-dealing covenants – prohibits the ex-employee from having any dealings with your existing clients, regardless of who makes the first approach
- Non-poaching covenants – state the ex-employee cannot poach your staff
Do employers have to pay during employer restrictive covenants?
In some jurisdictions, for example, Germany, an employer has to pay an employee if they are subject to a restrictive covenant, but this is not the case in the UK. However, if you place an employee on gardening leave, you must continue to pay their salary and benefits.
Are restrictive covenants enforceable after redundancy or termination of employment?
It may surprise you to learn that the answer to this question is, yes. This is because the Employment Tribunal will assess the fairness and reasonableness of the restrictive covenant clause as of the time the Employment Contract was signed. Therefore, the reason the employee leaves the business has no bearing on whether or not the covenant is enforceable.
Can I enforce a restrictive covenant if an employee claims wrongful or constructive dismissal?
It’s a general principle of contract law that if an employer breaches the Employment Contract terms, for example, by dismissing them without notice or refusing to issue their final pay, the employee is not bound by any terms that survive the termination, including a restrictive covenant.
In constructive dismissal cases, the employee is resigning in response to a repudiatory breach of their contract and considers themselves dismissed. Due to the repudiatory breach, an employer cannot enforce any post-termination terms, including a restrictive covenant. It’s crucial to note that none of the above principles applies in cases where the employee claims unfair dismissal.
Get legal assistance from LawBite
Restrictive covenants can provide you with significant protection. To ensure the clause/s you rely on are enforceable, speak to one of our employment law solicitors. They will be able to discuss the restrictions you can use and help to add the correct clauses. They can also review your current contracts to determine whether:
- They cover the necessary rights and obligations (from both employer and employee perspectives)
- They need to contain any non-standard provisions
- Any liabilities need to be included
- You can legally end the contract if needed
- It’s a legally binding agreement (from both employer and employee perspectives)
Please note: Before you amend an existing Employment Contract, you will need to gain the consent of your employee(s). Failure to do so could lead to a claim being brought against you at the Employment Tribunal.