There's a widespread myth that restrictive covenants in employment contracts aren't enforceable. This is untrue - well-drafted covenants which are reasonable in scope and duration may well be enforceable. The key test is whether a covenant protects a legitimate business interest, and whether it goes no further than reasonably necessary.
Employers who fail to include such provisions in employment contracts for senior/client-facing staff are putting themselves at a competitive disadvantage. On the other hand badly-drafted or unreasonable clauses aren't worth the paper they're written on (and can give the employer a false sense of security).
Here are some key points to consider when putting restrictive covenants in place.
Which employees?
Restrictive covenants are most effective - and most likely to be enforceable - against staff who would have the ability to damage the business if they left. They might be privy to a lot of confidential information in their role, have significant client contact or manage key staff. Very junior or purely administrative staff probably won't do so. A targeted, rather than scattergun, approach is best; and tailoring the restrictions to address the particular risks.
One important point: whether a restrictive covenant is enforceable or not is judged by looking at the situation at the time the contract was entered into, including looking at the employee's role at that point. So if someone signs a contract with restrictive covenants when they're in a junior role, but works their way up into a key senior position, the Court would consider whether the restrictions were reasonable for an employee in the junior role. As a result, it's important to consider updating contracts as staff are promoted (although you need to ensure that they receive some form of 'consideration' - i.e. payment - for agreeing to new restrictive covenants).
What restrictions?
Typical restrictions include:
- non-compete: prohibiting them from joining a competitor for a period of time after they leave
- non-solicit: prohibiting them from proactively approaching clients/customers after they leave
- non-deal: prohibiting them from doing business with clients/customers after they leave
- non-poach: prohibiting them from persuading key staff to leave
- non-employ: prohibiting them from employing key staff after they leave
In each case, these need to be drafted carefully to maximise the chances of enforcement. For example, restrictions related to clients or customers should usually apply only to those the employee dealt with recently (e.g. in the last 12 months of employment). The drafting needs to be carefully tailored to the employer's business and the employee's role.
In addition, it's advisable to have the right to place the employee on garden leave during their notice period.
How long?
The covenants should apply to the employee only for as long as necessary to protect the business' legitimate interests after their employment ends. The key question is how long the employee will be able to damage the relevant business interest - e.g. how long does the confidential information remain current, how long will their influence over clients or employees last?
The more onerous the covenant, the harder it will be to justify a lengthy duration. So, while a 12 month non-solicitation clause might be enforceable, it will be harder to persuade a court to enforce a 12 month non-compete. Covenants lasting for more than 12 months are very rare in employment contracts and are likely to be difficult to enforce.
If the contract contains a garden leave clause, it's usual for time spent on garden leave to be offset against the duration of the restrictive covenants. Although failing to include an offset doesn't necessarily mean the covenants will be unenforceable, the overall length of time that the employee is 'out of the market' will be taken into account when determining if the covenant is enforceable.
Other key considerations
If you are introducing restrictive covenants for an existing employee, rather than a new joiner, you need to make sure that they receive 'consideration' for agreeing to them. Unlike other contractual terms, putting the covenants in a deed won't make them enforceable without consideration. Consideration does not always have to be in the form of cash, but there should be some benefit which is clearly attributable to the new contractual terms. Employers should also ensure there is clear evidence of the employee's agreement, i.e. a signature. Although covenants have been enforced when a contract was unsigned, it's far better to avoid a dispute about whether the employee agreed by making sure you have a signed contract on file.
In the next article in this series, we'll look at practical steps for enforcing restrictive covenants...watch this space.
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