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 may lead an employee to contest the validity of the restrictive covenant in an employment tribunal or court.
For example, it’s a legitimate business interest to try and stop a competing company from taking your talent.
You will find it hard to argue that you are protecting a legitimate business interest by preventing an employee from working in the same industry for years after they leave.
These types of restrictions must be no wider than is necessary to protect your particular business interest.
But what are restrictive covenants? How do they affect your employment law and contractual obligations? 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. From an employment law perspective, 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
- Influencing other employees to join a direct competitor
- In certain cases, dealing with prospective customers of your business
There are specific types of restrictive covenants. Employers should explain their reason for including the restrictions and seek to have employees agree to them by signing their employment contract before they start work.
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. Non-competition covenants can be difficult to enforce for example. If you already have strong confidentiality clauses in the employment contract to protect your key information, additional non-competition clauses may be deemed unnecessary.
In addition, you may be unable to enforce a non-competition covenant if the geographic region you specified is too wide. The restriction must be limited to protecting your legitimate business interest. Stopping an employee from entering a new geographic market where you don’t trade is likely to be unenforceable.
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 expensive injunctions in the High Court.
This is why understanding contracts & documentation is important.
You cannot enforce vaguely drafted clauses. You risk them being unenforceable.
To enforce these common restrictive covenants, the employer must fulfil certain factors:
First of all, your business must have a legitimate business interest to protect. This could include trade secrets and other industry-specific knowledge.
The restrictive covenant will only be enforceable if it is no wider than is necessary to protect the legitimate business interest. For example, the breadth of the geographical area that the previous employee is restricted from setting up in must be reasonable. A restrictive covenant is generally limited by time and geographical area to avoid making it an illegal restraint of trade.
While not common, a breach of restrictive covenants can merit legal action. The courts can intervene, depending on the severity of the breach.
Do restrictive covenants expire?
Yes, restrictive covenants should be limited in time to avoid being deemed restraints of trade.
Your employment contracts should be reviewed regularly to ensure that any restrictive covenants are relevant to the role and that the restrictions only go so far as is necessary to protect your business interest.
For example, a poorly drafted contract can impact whether an employee wants to accept a role. If a contract features extremely restrictive clauses, it can put the employee off taking the job.
A potential employee should always understand the contract that they sign.
You must acknowledge restrictive covenant employee rights that prevent unreasonable restrictions.
An unreasonable period of time will be any length of time that goes further than necessary to protect your legitimate business interest.
Do restrictive covenants apply to redundancies?
As an employer, you are entitled to enforce restrictive covenants post-redundancy. This can only be decided on a case by case basis and you may choose to waive your right to enforce these restrictions.
This could be a sensitive matter and an aggrieved former employee may seek legal advice in this case and take the matter to court.
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.