When an employee leaves an organisation, some employers may wish to place a restriction on their employment activities for a period of time. Restrictive covenants allow you to do just that. They’re also vital for protecting intellectual property and customer contacts. In this guide, we explain how to use them for your business.
What are restrictive covenants?
They’re usually in use as a separate clause in employment contracts and can differ greatly depending on the circumstances. Businesses can choose to strengthen any restrictive covenants as employees become more senior and develop more influence. This is rather than having a one-size fits all policy for the entire workforce.
What types of restrictive covenants are there?
There are four types you can consider:
- Non-competition: Use this so your employment contract states they cannot work for competitors for a specified period of time, within a specified geographical area.
- Non-solicitation: These prevent staff from soliciting the business of clients or customers from you, unless they’re contacted directly.
- Non-dealing: They prevent the employee from engaging with any activity with former customers or clients—regardless of who makes the first contact.
- Non-poaching: Prevents employees from encouraging former colleagues to leave you and join them in their new organisation.
While these employment restrictions provide a way for you to protect your legitimate business interests, to be enforceable a restrictive covenant must be reasonable. If they’re drafted too widely, or place too much of a burden on the staff member, then an employee can challenge post-employment restrictive covenants. This may be the case if the breadth of activities the employer is trying to restrict is too broad or the period of time is greater than that which is appropriate in the circumstances.
Unreasonable restrictive covenants
But what happens if a former employee breaches their restrictive covenant? First, you must check to ensure that what you’re trying to enforce is in their employment contract. Remember, if you attempt to enforce the covenant on the basis an ex-employee has breached a term, it may be open to the ex-employee to assert that it was unreasonable. When assessing the reasonableness, a court will consider the position of both parties at the time it began. This is rather than the position at the time you’re seeking to make use of the covenant. They’ll also factor in whether such employment restrictions are commonplace in the particular industry. To avoid the risk of a ruling overturning a restrictive covenant, you should review these periodically to determine whether they’re fit for purpose. If it does require a change, you must follow the correct procedure to amend any contractual terms (see restrictive covenants and contracts of employment for more help).
Looking for help?
Our business consultancy services can help you understand how to approach setting up restrictive covenants. Contact us today on 0800 028 2420.