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What is a restrictive covenant?
Post-termination restrictive covenants are regularly found in employment contracts and they are an important tool, designed to protect the employer’s confidential information, customer connections, goodwill and workforce.
If employees have knowledge of technology, strategic information about their employer’s business or customer contacts, they may be prohibited from using this knowledge for the benefit of their new employer or business, by restraining the employee from, for example, soliciting customers or poaching other employees of the former employer. Restrictive covenants are therefore commonly contained in the terms of employment for senior executives and senior employees.
When it comes to the end of the employment relationship, our commercial litigation team regularly advise both employers and employees on enforcing restrictive covenants and defending proceedings for breach of restrictions.
Our employment team also routinely advise employers and senior executives in relation to the drafting and enforceability of post-termination restrictions and employee confidentiality requirements.
How We Can Help
If you are thinking of leaving your employer or have found yourself in a situation whereby your employment has been terminated, your activities after the end of your employment may be restricted by restrictive covenants contained in your contract of employment which prevent you from taking another role or setting up your own business. Our commercial litigation team can work quickly and efficiently to review the matter and advise on the enforceability of the restrictions and action required.
Likewise, we also advise employers in the context of seeking to enforce restrictive covenants.
Disputes arising at the end of the employment relationship can be dealt with in a variety of ways, depending on the nature of the dispute and whether there is a need for urgent relief. We can advise in relation to exit strategies, pre-action correspondence, commencement and defence of legal proceedings in relation to employer recovery of damages and enforcement by way of injunctions. Commonly an application for injunctive relief will be required.
Our litigation solicitors are experienced in both making and defending applications for breach of restrictive covenants and in recognising when an application for an injunction is needed. We pride ourselves in providing swift and authoritative advice and taking a proactive approach.
Our commercial litigation and employment departments work hand in hand in guiding our clients to the most appropriate and cost-effective solution.
Drafting restrictive covenants for Employers
All businesses should ensure they have appropriate post-termination protection in place in relation to their senior employees. Otherwise, you risk key employees leaving with important information and customer or supplier contacts and the ability to compete and damage your business. It is also important to ensure this protection is kept up to date to ensure it remains enforceable.
Our employment team draft documentation on behalf of employers to maximise the prospect of the enforceability of such provisions, together with taking steps to protect our clients’ interests to enforce restrictions.
Drafting restrictive covenants for Employees
Restrictive covenants can be unfairly onerous and should be challenged at recruitment if they go too far. They may also be unenforceable if they are drafted incorrectly or try to restrict an executive more than they should.
Our employment team also routinely advise senior executives in relation to the enforceability of post-employment restrictions and employee confidentiality requirements.
We can draft or review documentation on behalf of individual clients to ensure that their position is understood and that their interests are fairly represented.
As an all service law firm, we are well placed to provide comprehensive legal advice to assist clients whether they are bringing or defending proceedings for breach of restrictive covenants, injunction applications or if assistance is required drafting and negotiating restrictive covenants at the outset of the employment relationship. Our commercial litigation and employment teams work closely together when dealing with restrictive covenant proceedings.
We understand the stress that can be caused when dealing with litigation, particularly when applying for or defending injunctive relief which is fairly common in matters concerning breach of restrictive covenants. These applications are urgent and a lot of work has to be done in a very short space of time. We work closely with third parties such as barristers to assist our clients in getting the right information and advice.
The litigation experts at Myerson are happy to discuss your situation in a no-obligation telephone call to assess your claim, give preliminary advice and suggest a way forward. We can also suggest innovative funding solutions where available to assist with the costs of the litigation.
Examples of our work
Some examples of our recent work in this area include:
- Acted on behalf of a regional firm of accountants to injunct a former accountant who was in breach of non-compete, non-solicitation and non-dealing clauses of an employment contract, to include issuing a High Court claim for injunctive relief and negotiating a suitable settlement, obtaining undertakings, damages and costs on behalf of the client.
- Defending a claim for breach of restrictive covenants brought against a football agent by the former employer, a large sports management agency, concerning non-solicitation and non-dealing clauses, to include negotiating favourable settlement terms on behalf of the client.
- Acting for the Claimant in proceedings for breach of restrictive covenants concerning a former franchisee setting up a rival business.
- Obtaining injunctive relief on behalf of the Claimant against a former employee in respect of misuse of confidential information and breach of a non-solicitation clause and non-compete clause.
Frequently Asked Questions
We answer some of the frequently asked questions we are asked by both employers and employees below.
Are restrictive covenants enforceable?
A contractual term (usually within your contract of employment) which restricts your activities after the termination of your employment will be void for being “in restraint of trade” and against public policy, unless your former employer can show that:
- It has a legitimate proprietary interest that it is appropriate to protect; and
- The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.
What is a legitimate business interest?
Examples of legitimate interests are trade connections (with suppliers, clients or customers), goodwill, customer lists and contacts, trade secrets and other confidential information and stability of the workforce.
What is reasonable?
If the employer has a legitimate interest to protect, it should not use a restriction which is wider than reasonably necessary to protect that interest. Therefore, in order to be enforceable, the restriction i.e. not to work for a competing employer should be limited in terms of the activities it restricts, the period during which the restriction is to apply and the geographical extent of its application.
What type of restrictive covenants can I enforce against my employees?
Non-compete clauses – used to restrict a former employee from working in similar employment for a competitor
Non-solicitation clauses – to prevent a former employee from poaching clients, customers and suppliers
Non-dealing clauses – to prevent a former employee from dealing with clients, customers and suppliers regardless of which party approached the other
Non-poaching clauses – to prevent an employee from poaching former colleagues
What can I do if an employee breaches a restrictive covenant?
If an employer believes that an employee has breached a restrictive covenant, the most common remedy sought under these circumstances is an injunction and a request that the employee deliver up or destroy confidential information. The court will be asked to prevent the employee from acting in a certain way and using information pending a trial.
An employer can claim damages for breach of a restrictive covenant if it can show some loss resulting from the breach. This will ordinarily be loss of profits on contracts or lost opportunities.
It may also be possible for an employer to choose to sue the former employee’s new employer if it considers that the new employer has induced the employee into breaching restrictive covenants. The employer is likely to have greater financial resources to pay any award of damages.
Do I have to agree to restrictive covenants in my contract of employment?
You can never be obliged to agree to restrictive covenants in your contract of employment and you are entitled to tell your employer that you do not agree with them.
However, restrictive covenants are a common feature of many contracts of employments, particularly when it comes to more senior employees and therefore, your employer may not be prepared to alter them.
In some circumstances, even with no restrictive covenants in an employee’s contract of employment an employer can still obtain an injunction restraining the employee’s actions.
The restrictive covenants in my contract of employment say I cannot work for a competitor for 12 months, is this right?
Whether or not a restrictive covenant is enforceable will depend on how widely it has been drafted.
The clause must be justified and sufficiently narrow in terms of the breadth of the geographical area, length of time it covers and activities it restricts.
As a general rule it is unlikely that a nationwide geographical area will be warranted and a restriction for more than six to twelve months will be hard to justify. However, in circumstances where a very senior employee, with access to highly sensitive information, with the ability to cause serious damage to a business, a restriction of 12 months may well be considered reasonable in the circumstances.
I want to leave my job and set up by own business, will the restrictive covenants in my contract prevent me from doing this?
If you have a non-compete clause in your contract of employment then you may be prevented from setting up your own business. This will depend on whether or not the clause is enforceable and has been validly agreed.
Is it possible to get out of a restrictive covenant in my contract of employment?
It may be possible to persuade your employer to waive or vary some or all of your restrictive covenants. Whether or not your employer agrees to this is likely to depend on the role you have in the business, your access to confidential or commercially sensitive information and the circumstances surrounding the termination of your employment.
What happens if I breach my restrictive covenants?
If a former employer considers that you might be in breach of a restrictive covenant, it may apply to the Court for an injunction to restrain your behaviour or conduct, for example, by restraining you from using a customer list or sharing confidential information with your new employer.
I have received a letter from my employer which says I am breaching a restrictive covenant, what do I do?
It is a very serious matter for a Court to grant an injunction to restrain your actions.
If your former employer is successful in obtaining the injunction, this is highly likely to cause serious difficulties for you in terms of you being ordered to pay your former employer’s costs of getting the injunction, ceasing your ongoing activities and potentially jeopardising your current employment/business activities.
If you are threatened with an injunction to restrain your activities, have received correspondence from your employer suggesting you may be in breach of restrictive covenants or if you simply wish to receive advice in relation to your position, please get in touch with one of our commercial litigation solicitors.
I have checked my contract of employment and there are no restrictive covenants, but my employer is threatening an injunction?
Even if there are no restrictive covenants set out in your contract of employment, it is still possible for a former employer to obtain an injunction to restrain your actions, known as a “springboard injunction”, if:
- There has been unlawful activity (i.e. you have unlawfully used your former employer’s confidential material); and
- You have gained an unfair competitive advantage over your former employer; and
- The nature and period of the competitive advantage is more than “short term”; and
- The advantage still exists at the date the springboard injunction is sought and will continue unless the injunction is granted.
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