By Kristie Willis, Solicitor, Employment.
Running a business comes with plenty of challenges, and one of the more frustrating ones can be facing competition from former employees.
Thankfully, restrictive covenants in employment contracts can help protect your business from these threats.
What are restrictive covenants?
Restrictive covenants are clauses included in employment contracts that limit what an employee can do after they leave your company.
These clauses help protect your business by keeping your confidential information secure, preserving client relationships, and maintaining your competitive advantage.
Here are the main types of restrictive covenants:
- Non-compete clauses – These prevent former employees from joining or setting up a competing business. The restriction usually applies to a certain area and lasts for a specific time after the employee leaves. While the previous Government had proposed capping this time to three months, there has been no indication that the new Labour Government will follow through with this. These are generally the most difficult to enforce as they are the most restrictive.
- Non-solicitation clauses – These stop ex-employees from reaching out to your clients or customers to do business with them for a set period.
- Non-dealing clauses – A stricter version of non-solicitation, these prevent any business dealings with former clients, regardless of who initiates contact.
- Non-poaching clauses – These clauses prevent ex-employees from persuading your current staff to leave and join them at their new company.
Are restrictive covenants enforceable?
Restrictive covenants are often seen as restraints on trade, which means they are not enforceable unless they are considered reasonable. For a restrictive covenant to be upheld in court, it must:
- Protect a legitimate business interest.
- Be no more restrictive than necessary to protect that interest.
- Not go against public interest.
Enforceability is not automatic and depends on the specific circumstances. Courts will consider factors like how long the restriction lasts, the geographical area it covers, what it is seeking to protect and the ex-employee’s role within your business.
Tips for business owners
Be specific
Vague or overly broad clauses are more likely to be struck down in court.
Make sure your restrictive covenants are clear and focused on protecting specific business interests.
Review regularly
As your business grows and market conditions change, your employment contracts should be updated to reflect those shifts.
Keeping your restrictive covenants up to date ensures they remain relevant and enforceable. The restrictions are reviewed on what was reasonable at the time they were entered into. They should therefore be reviewed if any circumstances change to ensure they are still relevant and necessary e.g. if the employee is promoted as this may mean that they would be viewed in context of the new role.
It is not straightforward to introduce new restrictive covenants to an existing contract so how to do this will need to be considered with your legal advisers. Restrictive covenants can be a powerful tool for protecting your business, but they are not foolproof and need to be carefully considered and drafted.
Taking the time to understand how they work and ensuring they are properly drafted will give you the best chance of defending your interests against former employees.
If you are dealing with competition from an ex-employee or need advice on drafting or enforcing restrictive covenants in employment contracts, contact our expert team today for guidance.