What is a restrictive covenant?
A restrictive covenant is a document that employers ask employees to sign as part of their contractual paperwork which places restrictions on any employment which the employee takes up once their current employment ends. It need not only be introduced at the start of employment – it may be introduced part way through employment with consultation and agreement with the employee.
They are put in place mainly to safeguard the employer’s interests in terms of protecting the sensitive information that the employee would have been privy to as part of his/her job which is integral to the employer’s company. Such information is considered invaluable to the success of the company and employers often want to take measures to prevent that information being used to their effective detriment by individuals once they are no longer employed by them. Areas that are usually offered such protection in a restrictive covenant are the industry knowledge gained by the employee whilst with the employer; the current client base, any prospective clients and also current employees.
What does a restrictive covenant do?
The practical effects of a carefully drafted restrictive covenant are:
Non-solicitation: the employee is prevented from approaching current clients of the employer or prospective clients (who have already been approached by the employer) to conduct the same business, either on their own account or as part of a competing business, as that conducted by the employer;
Non-competition: the employee is prevented from conducting the same business, either on their own account or as part of a competing business, as that conducted by the employer;
Non-dealing: this is similar to non solicitation but prevents the employee from dealing with the employer’s clients whosoever has initiated the contact between the parties;
Non-poaching: the employee is prevented from poaching employees of the employer.
All of these restrictions are placed on the employee in respect of a limited time period post termination. This time period will differ from employer to employer, but is often for no longer than 12 months. Occasionally a restrictive covenant will restrict an employee’s future employment in terms of geographical location by stating that that employment cannot be taken up, within the designated time period, within a given radius – measured in miles/ kilometres – from the employer’s premises.
Employers do not have free will to construct restrictive covenants as they wish. In order for a restrictive covenant to be valid in the courts, it must be considered to be reasonable so cannot place a blanket restriction on the employee’s future employment. The time period and/or the geographical radius within which the restrictions are placed must not be unrealistically wide and therefore each employer should consider carefully the parameters they will include taking into consideration where in the UK they are situated and their particular industry.
The seniority of the particular employee should also be a factor in deciding the parameters because it is likely that more senior employees will have access to more sensitive information than employees further down the line.
A restrictive covenant is legally binding document which the employer may enforce though the courts if it is alleged that the employee has breached it. Enforcement will take place through the civil courts, rather than an Employment Tribunal, and if the employer is claiming damages, he should be able to show that his company has suffered financial loss from the breach.
If you have any queries regarding this issue please call our 24 Hour Advice Service on 0844 892 2772.
Safeguard Important And Sensitive Company Information Using Restrictive Covenants
December 23 2011