Restrictive Covenants are a common part of employment contracts – but when can enforceability become a problem?
Restrictive covenants have been in the headlines recently, triggered by the government’s consultation on whether their use hinders workers from moving freely between employers, stifles innovation and/or generally prevents the creation of start-up businesses after leaving a job.
Understandably organisations are keen to limit the post-employment activities of departing employees, if those employees are senior or privy to sensitive business information. Restrictive covenants are commonly used in employment contracts to stop ex-employees from taking clients and/or staff with them when they leave and creating competition. However, as a matter of public policy, restrictive covenants are considered a restraint of trade by the courts.
A quick overview of the legal position:
The basic principle is that restrictive covenants will be void and unenforceable unless an employer can show that:
- It has a legitimate business interest that requires protection; and
- The protection sought is reasonably necessary having regard to the parties concerned and the public interest.
Essentially the restriction should be as limited as possible in scope. It should also afford the employer the minimum amount of protection necessary in order to protect the business interest concerned.
A recent High Court case, Legends Live v Harrison, highlighted that even if a restrictive covenant is found to be reasonable, valid and enforceable, an injunction to enforce may still not be granted, at the court’s discretion.
This case involved a Michael Jackson impersonator, Mr Harrison. Legends Live applied for an injunction to stop him performing in any other multi-tribute act after he left its employment.
The court felt that it would be inequitable to enforce the covenant as the deliberate timing of the injunction was designed to disrupt a competitor’s business. They cited the ‘unreasonable delay’ in issuing the claim. An application for an injunction was made a few days before the financially crucial entertainment season began and was therefore timed to cause maximum damage.
Courts have a wide discretion regarding enforcement; speed and motive are factors taken into account whilst the court balances the protection sought by the Claimant company and the wider issue of restraint of trade. A well drafted covenant may not, alone, be sufficient.
What does this mean for you or your business?
Blanket restrictions, although they may act as a deterrent to employees, are not likely to be enforceable.
It is essential that restrictive covenants are drafted carefully, taking into account the specific circumstances and factual background in each case. A restrictive covenant is far more likely to be enforced if you can show the judge that the drafting is tailored to the specific employee or job role. It is important to note that in these situations you only get one chance to ‘get it right’.
In addition, the above case highlights that despite a well drafted restrictive covenant, tactics may still prove a downfall when it comes to enforceability of restrictive covenants. Drafting alone is not enough. Should you wish to enforce a restrictive covenant speed and motive of the application are important factors to consider.
What do you need to be doing now?
- Remember that the starting point for all restrictive covenants is that they are void and unenforceable. It is for the employer seeking to rely on them to show that they are reasonable.
- Any uncertainty in drafting will be picked apart, so ensure that any wording and definitions used are crystal clear and not open to alternative interpretation.
- Tailor every clause to the employer/employee in question, with careful thought into the job role itself.
- Consider what situations may arise in the future and what protection is likely to be needed.
- Consider what a reasonable duration of the restriction would be. As a general rule, anything over 6 months is unlikely to be enforceable. However if the information an employee is privy to is redundant after 1 month, for example, the restriction sought should not exceed this.
- Consider whether the same level of protection may be afforded by other means; a garden leave clause, for example.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.