What is a restrictive covenant?
A restrictive covenant is a clause in an employment contract which limits activities which employee can undertake should they leave the business.
How and why are they used?
Restrictive covenants are generally used to protect an employer’s legitimate business interest, usually when an employee is leaving the business. Often employees, particularly senior executives and directors, have access to vast amounts of sensitive data including commercial reports and strategic plans as well as access to key clients.
If an individual chooses (or is required) to leave the business, there may be temptation to take some or all of this information with them, either to a rival firm or potentially to start up their own competing business.
Covenants can be drafted to include restrictions on the types of work undertaken and limiting the geographical area in which a former employee can work. They can also focus on relationships with key clients, preventing an employee from targeting specific businesses for a prescribed period of time to allow the original employer time to cement the relationship.
Things to bear in mind when using restrictive covenants
- they are not enforceable as a restraint of trade, unless:
- a) a party is seeking to enforce a legitimate business interest (and goes no further); and
- b) the clause is reasonably drafted in terms of the conduct it seeks to capture (and limit).
- If there is a breach or dispute it can be lengthy and costly. Consider the costs and benefits of pursuing a case and whether it is worth the time and money
What can an employer claim is reasonable legitimate interest?
Legitimate interests can range from protecting trade secrets or IP to networking with clients. To be ‘reasonable’ the employer must balance their legitimate business interest with the individual’s right to freedom of movement and to earn a living. Any covenant should therefore focus on the business interest.
What if a restrictive covenant is breached?
If a restrictive covenant is breached, an employer can take a number of steps to enforce these provisions in a number of ways including:
- An injunction - a court order which, if granted, will stop the employee from doing what they are doing or planning to do, in breach of contract. An injunction can be for a specific period of time or indefinite, but is only likely to be granted where damages would not be an adequate remedy.
- A financial claim for any lost profits resulting from the breach.
- An application for an order for an account for lost profits as a result of the breach. A successful claim in this respect would allow the party seeking to enforce to recover the profits that the former employee (and/or their new employer) has made as a result of the unlawful conduct; and
- The delivery up and destruction of all confidential information (however it is held).
Litigation of this nature is particularly fact sensitive. Any evidence needs to clearly explain the alleged breach and the court will need to be satisfied that the restrictions only go as far as is required to protect the legitimate interest of the party seeking to enforce them.
For more information about using restrictive covenants or any other employment law matters, contact firstname.lastname@example.org
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.