Restrictive covenants & employment law

18 November 2020

Restrictive covenants are specific clauses within employment contracts that aim to protect the employer.

 

These types of restrictions rarely affect an employee during their time in employment. But they can affect them for some time after they leave their employer.

 

Restrictive covenants in employment law include not sharing confidential information or trade secrets.

 

These protect the legitimate business interests of an employer.

 

Anything not deemed a legitimate interest is valid to raise in an employment tribunal.

 

For example, it’s a legitimate business interest to try and stop a competing company from taking your talent. 

 

It isn’t a legitimate business interest to prevent an employee from working in the same industry for years after they leave.

 

But what are restrictive covenants? How do they affect employment law? And how can they affect employees even after leaving a company?

 

Peninsula addresses these questions, and more, below.

 

What is a restrictive covenant?

 

A covenant is a promise to engage in or refrain from a specified action. In relation to employment law and contracts, a restrictive covenant is a clause within a contract of employment. 

 

These clauses can vary in what they ask an employee to engage in or refrain from. 

 

There are common types of restrictive covenants for many industries. Some apply to all industries and are common employment contract clauses.

 

This includes starting a competing business and hiring employees from their previous company.

 

This is ‘poaching’.

 

These agreements aim to prevent:

 

  • Dealing with a previous employer’s customers or suppliers
  • Not joining a direct competitor
  • Sharing restricted company knowledge
  • Making unjust negative feedback of an employer public

 

There are specific types of restrictive covenants. Employees should agree to these before they start work for an employer.

 

Restrictive covenants in employment contracts examples include:

 

  • Non-poaching covenants: these state that an employee cannot poach former colleagues. This applies to both former employees poaching them as either colleagues or employees.
  • Non-competition covenants: these place restrictions on a previous member of staff working for a competitor. The duration of this covenant varies with industry and level of seniority.
  • Non-dealing covenants: these state that the employee cannot work with ties to the previous employer. These include clients, suppliers, and customers in any capacity.
  • Non-solicitation covenants: these place restrictions that state the previous employee cannot poach from the employer. This includes poaching clients, suppliers, and customers. This covenant varies from the previous covenant. Clients, suppliers, or customers can approach the former employee.

 

Can restrictive covenants be enforced?

 

Yes, to some degree.

 

Enforcing restrictive covenants largely depends on what clause it is. Some can be negotiated, while others aren’t easy to dismiss.

 

For example, a non-competition covenant can be dismissed if the competition is far away from the original company. But, it’s hard to argue that a job offer from a direct competitor isn’t a violation of a non-poaching covenant.

 

Because of this, it is vital to draft restrictive covenants in employment contracts in Ireland correctly.

 

You must draft contracts in a manner that’s fair to employee and employer alike.

 

Mishandling contracts can be damaging to a company’s reputation. It can even lead to the high court.

 

This is why understanding contracts & documentation is important.

 

You cannot enforce vaguely drafted clauses. You risk them being unenforceable.

 

This would include trying to enforce more than one of the previous contract examples.

 

To enforce these common restrictive covenants, the employer must fulfil certain factors:

 

  • The protected type of interest merits potential for protection. This includes trade secrets and industry-specific knowledge.
  • The breadth of the geographical area that the previous employee will move on to. This applies to an employee moving to a competitor within the same city. It is unlikely to be valid for cases where an employee leaves the geographical area This can include leaving the country.

 

While not common, a breach of restrictive covenants can merit punishment. The courts can intervene, depending on the severity of the breach.

 

Do restrictive covenants expire?

 

These clauses often expire within six months to a year.

 

Knowing whether an employment contract has these clauses is important. 

 

For example, they can impact whether an employee wants to accept a role. If a contract features extremely restrictive clauses, it can put the employee off the job.

 

A potential employee should always understand the contract that they sign.

 

Understanding when any agreements in a contract expires can be vital. This can help to see if there are risks of breaching any contracts.

 

There are restrictive covenant employee rights that prevent unreasonable end periods.

 

An unreasonable period of time includes beyond a year.

 

Do restrictive covenants apply to redundancies?

 

It is worth noting that an employer cannot restrict someone’s ability to work at all. This means that you cannot enforce these clauses if an employee leaves due to redundancy.

 

Employers may attempt to enforce contract restrictions. This may occur even in the event of a redundancy.

 

You may resort to offering a generous severance package to enforce these restrictions.

 

An employee is within their rights to seek legal advice in this case and take the matter to upper tribunals.

 

Do restrictive covenants affect HR?

 

Simply put, yes. 

 

Understanding how agreements in employee contracts can affect employees can prevent a lot of stress.

 

This is because an employee may wish to negotiate any clauses in their contract. Employers may make contracts too vague, which may need an HR team’s involvement.

 

Employees might wish to discuss clauses in their contract at any point. This can include the point of accepting a job offer and moving to a new company.

 

HR departments may have to mediate between a previous employee breaching covenants and an employer.

 

Need our help?

 

Expert HR advice is available 24/7. You can get in touch with our team of specialists for help with handling employees concerned with covenants. 

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