Overview
- A restrictive covenant will generally be enforceable if an employer has a legitimate business interest to protect and any restraint is reasonable.
- The nature and character of the business in which the employer and employee have been involved are relevant when deciding whether a restrictive covenant is reasonable.
- Covenants restricting the employee to a greater extent than is reasonably necessary to protect the employer's legitimate interests will be unenforceable.
- Employers cannot restrict former employees from using their skills, aptitude and general technical knowledge gained while in employment, but may impose reasonable restrictions to protect their business against such employees' use of knowledge and influence over the employer's customers and such employees' awareness of the employer's trade secrets or confidential information.
- Employers should never be tempted to use 'off the shelf' covenants - they must be tailor-made to their specific circumstances and drafted with professional help.
- An employer cannot enforce restrictive covenants if it has breached the employee's contract of employment (e.g. wrongful or constructive dismissal).
Imposing covenants
- Ideally restrictive covenants should be in an employment contract from the outset but people's roles change and, if they were not included at the hiring stage, it is possible to include them later on.
- If the employer has identified a legitimate business interest to protect, has consulted with the employee and has urged them to take independent legal advice, such covenants can be imposed during the course of employment.
- If an employee will not agree to them in such circumstances, the employer can terminate the employee's contract and this may be considered a fair dismissal under the 'some other substantial reason' heading - as long as the employee has been consulted and it is not just a ruse to get rid of the employee.
- Covenants are sometimes introduced as part of an agreed termination package, particularly when none existed before or those that did were defective.
What can be protected?
- Legitimate business interests which are capable of protection by means of a restrictive covenant include:
- trade secrets and/or confidential information
- trade connections, customers and suppliers
- the skills and integrity of the employer's workforce
- Where a trade connection is relied on to justify a restriction, the employer must show both the existence of the trade connection (e.g. clients or suppliers) and that the employee is likely to be able to take advantage of the employer's trade connection by means of his personal knowledge of and influence over them.
- While business secrets and confidential information are definitely capable of protection, the more difficult test is deciding whether or not the information is truly confidential. A distinction should be drawn between true trade secrets and confidential information which an ex-employee may not use to his own advantage in a new job - and general skill, knowledge and expertise which an ex-employee can make use of. It obviously helps in finding that information is properly confidential that the former employer and the workforce have treated (and labelled) such information as confidential.
- Assuming that an employer has legitimate business interests to protect, it should ask itself whether it needs protecting from a particular employee, i.e. ask the following questions:
- Does the employee have access to confidential information or trade secrets?
- Does the employee have significant dealings with and influence over clients or suppliers?
- Does the employee have significant influence over members of the workforce?
- What positive detriment will be caused by the ex-employee joining a competitor or setting up in competition?
- It is usual to draft a restrictive covenant in such a way so that any part of the restriction which is held to be unacceptable to a court may be disregarded without affecting the remainder of the restriction.
Reasonableness
- When deciding whether a restrictive covenant is reasonable, the following criteria will be relevant:
- it will be assessed at the time the covenant was entered into, coupled with the expectations of how the relationship/business would develop
- the court will assess the 'balance of convenience' as between the employer and ex-employee
- seniority and the nature of the job will be relevant - often a more senior employee will have more opportunity to learn trade secrets or gain influence over customers/suppliers or key members of the workforce
- the ex-employee should not be restrained from carrying on activities outside the area of business of the employer
- any restriction should be limited to competing businesses and competing products or services
- the period of the restraint will be an important factor, e.g. for covenants aimed at protecting a customer connection, how long is the minimum time required to protect the connection?
- the notice period may be relevant, especially where the contract contains a 'garden leave' clause
- close definition of the confidential/secret information and/or the categories of customers/key suppliers
Types of restrictive covenants
- Typical restrictive covenants attempt to restrict the following activities on the part of the employee:
- disclosure or use of the employer's confidential information
- working for a competitor
- soliciting the employer's customers/suppliers
- soliciting the employer's remaining employees
- dealing with the employer's customers/suppliers/employees
Confidentiality
- The employer has a legitimate and protectable interest in ensuring that ex-employees do not disclose trade secrets and certain highly confidential information to competitors after the employment has ended. In ascertaining what the employer can and cannot protect in addition to trade secrets, a distinction has to be made between information which is the property of the employer and information which is part of the employer's know-how.
- For confidential information to be protected the employer has to show that:
- the information is used by the employer in its trade or business
- the dissemination of that information is limited
- if the information was disclosed to a competitor, this would cause significant harm to the employer's business interests
- The employee's duty not to disclose confidential information after termination of employment can only apply for so long as the information remains confidential. Usually, confidential information other than a highly specialised trade secret has a 'shelf life'.
Non-competition
- A non-competition clause is the least likely type of restriction to be enforceable as in many cases it is more appropriate to use a non-solicitation clause to protect the employer's legitimate business interests.
- But the courts will enforce such a clause where it is the only means of protecting the employer's trade secrets but then only for a very limited period of time.
- It is important that a non-competition provision is limited to preventing the employee from competing with the type of business in which he or she was involved whilst employed. There should be a functional correspondence between the actual area protected and the customers. For example, if a recruitment consultant is restricted from working within 5 miles of the office, the employer would have to show that there is a correspondence between where the clients are based and this 5-mile limit.
- These types of covenant are often only used by businesses such as hairdressers, solicitors, etc. where the trade is very local.
Non-solicitation of customers
- Such clauses stand a greater chance of being enforceable because they do not prevent the employee from working.
- It is important to define 'customer' or 'client'. The restriction in most cases should be confined to current customers with whom the employee has personally had recent and material contact.
- One of the difficulties with non-solicitation clauses is that it is difficult to show 'solicitation', i.e. actively trying to entice someone to join a new business. There is also a fine line: e-mailing someone with new contact details may not be solicitation but offering to come and do a presentation will be.
- Therefore linking non-solicitation with a non-dealing clause can be more effective. Even if the employer cannot prove that the former employee approached the customer to get the work in, if they are actually doing the work directly or indirectly, then this will be a breach of the covenants.
- Any clause which seeks to apply to potential customers would have to be very carefully worded. It could be appropriate for example to limit the definition of potential customers/clients to those with whom the employer is/was in active negotiations.
Non-solicitation of staff
- An employer has a legitimate and protectable interest in seeking to maintain a stable and trained workforce so far as is reasonable.
- To be enforceable the type of employee who cannot be solicited should usually be:
- a key or senior employee
- employed immediately before the departing employee left employment
- someone with whom the departing employee had personal dealings or was responsible for in the relatively recent past
- Other factors which will be relevant include the:
- degree of influence the senior employee had over the relevant key employees
- clarity with which those key employees are defined
- investment which the original employer has made in ensuring it has a properly trained workforce
- nature of the intended role for key employees in the new business
- length of the restraint
Non-dealing
- Non dealing restrictive covenants are wider than non-solicitation covenants in that they seek to prevent the employee from having any dealings with the employer’s customers at all. The aim is to prevent the ex-employee from responding to customers who approach him unsolicited, as well as restraining the employee from dealing with those whom he approaches directly.
- From the employer’s point of view, such a clause is attractive because it would prevent an ex-employee from responding to customers/clients who approach him or her unsolicited and the employer does not have to prove solicitation on the part of the employee.
- Certainly a non-dealing clause is more likely to be acceptable where other clauses (e.g. a non-solicitation clause) would not provide adequate protection for the employer. And the narrower and more specialist market in which the employee is working, the more likely it is that a non-dealing clause will be enforceable.
- But if a non-dealing clause amounts effectively to a non-competition clause the courts are unlikely to find it reasonable.
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