A detailed guide on restrictive covenants.
Restrictive covenants will often be included in a service agreement for a senior executive with the aim of restricting an employee's activities after their employment has ended.
The purpose of restrictive covenants
Restrictive covenants are used by employers to protect business interests such as trade connections, (with customers, clients or suppliers), trade secrets, confidential information and maintaining the stability of their workforces.
Restrictive covenants are usually incorporated in the contract of employment. However, employers can also ask senior executives to enter into additional or amended restrictive covenants part-way through the employment relationship; for example, where employees are promoted or are transferred into new internal roles.
Employees will be bound by the terms of any restrictive covenants from the first day of employment. When a senior executive leaves a company, irrespective of the length of time they have been employed, they will still be legally bound by the covenants, (provided that they are enforceable – see further below). Therefore, it is imperative that senior executives understand the implications of the restrictive covenants and their scope before agreeing to them.
What post-employment activities can be restricted?
An employer might seek to introduce any of the following covenants:
- non-compete – this covenant seeks to prevent a senior executive from joining a competitor for a specified period after termination
- non-solicitation – this covenant prohibits a former senior executive's positive act of contacting or enticing customers or clients of their former employer, with a view to obtaining their business
- non-dealing – this covenant prevents any contact with customers or clients of their former employer at all, regardless of whether any solicitation or enticement has occurred
- non-poaching – this covenant prohibits a former senior executive from attempting to poach former colleagues or make any offers of employment
- non-employment - this covenant goes beyond the non-poaching restriction, as it prevents a senior executive from employing or facilitating the employment of their former colleagues without any requirement for solicitation.
Is the restrictive covenant enforceable?
If there is a legitimate business interest to protect, the restriction will be enforceable if it is no wider than is reasonably necessary to protect that interest.
The test of reasonableness requires a balancing exercise to be carried out between the interests of the employer's business and the individual's right to freedom of movement and to earn a living.
What can a senior executive negotiate?
- the wording or scope of the restrictive covenants
Where a senior executive arrives in a job with a 'following', i.e. a number of customers or clients with whom they have an existing business relationship and a personal connection, they could negotiate a specific carve-out in respect of those clients or contacts, so that such clients are exempt from any non-solicitation restrictions.
A senior executive could negotiate to reduce the scope of the covenants to narrowly defined areas of the business, which could help to limit the effect of the restrictions. A senior executive could also negotiate to decrease the length of the restrictive covenants.
- the amount of consideration
Where restrictive covenants are introduced during the employment relationship, for example, where the senior executive is promoted, the employer should provide specific consideration, expressed either as a lump sum or as being linked to a pay rise. Therefore, a senior executive could negotiate the amount of consideration that they would receive in exchange for entering into the covenants, to ensure that they are adequately compensated.
Although there is no need to assign specific consideration to restrictive covenants at the outset of the employment relationship, a senior executive could still attempt to negotiate a higher salary or increased benefits if the restrictive covenants are particularly onerous.
- the existence of restrictive covenants
A senior executive could refuse to sign or accept the restrictive covenants entirely. However, an employer might seek to dismiss an employee for such a refusal, or, if the senior executive has not yet commenced employment, the employer might withdraw the job offer.
How can the restrictive covenants be enforced?
The common remedies available to an employer when seeking to enforce a restrictive covenant include:
- injunctive relief (either as interim relief where there is a need for greater urgency, or as final relief following trial). In Hine Solicitors Ltd v Jones and another , the High Court dismissed an application for an interim injunction because it found that there was no serious issue to be tried; there was no evidence before the court that the employee had enticed clients away or had undertaken any activity which would place her in breach of the pleaded implied term of fidelity
- undertakings by the employee to observe the restrictive covenants
- financial damages, (if an employer can prove that particular damage has been suffered as a result of the unlawful activity, or because substantial future damage is likely to occur in the absence of an injunction).
Claims can also be brought against the senior executive's new employer on the grounds that they have induced or conspired with the senior executive to breach their contractual restrictions.
If you require legal advice in relation to restrictive covenants, for example if you are entering into a new contract of employment or are leaving your current employer to join a competitor, please contact Ben Dos Santos.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.