What is a restrictive covenant?
A restrictive covenant is a contractual term included in a contract of employment (or sometimes a deed of restriction) intended to restrict an employee’s competitive activities after the employment has ended. Restrictive covenants usually seek to restrict a former employee from working with a competing business, or from soliciting away from the original employer customers or employees. Such restrictions are usually limited for a period of time, for example, 6 months.
What is a breach of restrictive covenant?
A breach of restrictive covenant occurs where an employee leaves employment and seeks to compete with a former employer in contravention of the restrictive covenants included in the employee’s former contract of employment. Breaching the restrictive covenant in this way is a breach of contract by the employee and the employee can be liable for loss caused by the breach. A new employer may also be liable for damage suffered for inducing the breach of contract.
How can I enforce a restrictive covenant?
The most effective enforcement action in relation to restrictive covenants is for the wronged employer to seek an urgent injunction from the Court. An injunction is a Court Order compelling an employee (and possibly a new employer) to comply with the terms of the restrictive covenant included in the contract of employment. Breach of the Court Order would be a contempt of court potentially punishable by imprisonment.
An injunction is a discretionary and interim remedy made to preserve the status quo between the parties until there can be a full trial of the issues. In practice, the granting of the injunction will deal with the dispute in its entirety as where the application is successful the wronged employer benefits from the restrictions on the employee.
Is a restrictive covenant enforceable?
It is a myth that restrictive covenants in contracts of employment contracts are unenforceable. Such restrictions are enforceable where they are carefully drafted, tailored to the circumstances and go no further than is necessary for the purposes of protecting the legitimate business interests of the employer.
There are a number of grounds on which an employee can challenge enforceability. These might include that the restrictions were not properly introduced as a term of employment or that the restrictions are excessive because, for example, the period of restriction is too long, or the geographical area of restriction is excessive. Employers seeking to introduce restrictive covenants into contracts of employment should seek advice on how to effectively and lawfully do so.