Restrictive covenants in employment contracts usually try to prevent an employee acting in a certain way after they have left employment. The most common are those preventing the employee from working in a competing business (non-compete) or soliciting clients and/or staff (non-solicitation).
We explain the common answers to questions that occur around restrictive covenants in employment contracts and the post-termination restrictions that can be applied.
What is a restrictive covenant in an employment context?
Restrictive covenants (also known as post-termination restrictions) are clauses within a contract of employment or settlement agreement which prevent an employee from taking certain action after the termination of their employment such as soliciting customers, clients or other employees for a defined period.
Why do employers include post-termination restrictions?
When employees leave a company they can use to their advantage for example any confidential information, customer details and tactics of their employer’s business to either benefit their new employer or to set up a competing business. This has the potential to have a detrimental impact on their former employer’s business.
Employees are subject to implied terms in their employment contract such as to faithfully serve their employer and act in the employer’s best interests however such terms are limited and tend to not extend after the employment contract has been terminated.
Express post-termination restrictions can assist employers with deterring employees from joining competitors, limiting the employee’s conduct to prevent them from damaging the former employer’s business and deterring a potential new employer who faces the risk of the restrictions being enforced and can themselves be vulnerable for claims for inducing a breach of contract.
What are the different types of post-termination restrictions?
The common types of restrictive covenants are as follows:
- General confidentiality – This seeks to prevent a former employee from disclosing sensitive or confidential information of their former employer;
- Non-solicitation – This seeks to prevent a former employee from contacting a customer/client/supplier of their former employer with a view to obtaining their business;
- Non-dealing – This seeks to prevent a former employee from carrying out any business with a relevant customer/client/supplier irrespective of who contacted who. These clauses have an advantage over non-solicitation clauses in that it removes the difficulty of providing that the former employee made the approach. However, due to it being a wider prohibition the court is likely to be more cautious about upholding it;
- Non-poaching/non-employment – This seeks to prevent a former employee from soliciting or employing other employees of their former employer;
- Non-competition – This seeks to prevent a former employee from joining a rival employer or engaging in any business which is in competition with their former employer’s business for a defined period after termination. These clauses are traditionally difficult to enforce.
The above restrictions may be subject to geographical restrictions preventing the former employee from carrying out activities in a specific area (usually as a defined radius around their former employer’s business).
As many businesses are now less reliant on a physical presence, particularly since the pandemic, geographical restrictions are much less common. However, they may still be appropriate for some businesses such as beauty salons, hairdressers etc who rely on local customers.
Are post-termination restrictions enforceable/binding?
When considering whether to enforce a post-termination restriction, the court will have regard to the principle of ‘restraint of trade’. The general starting point is that any contractual term in an employment contract which restricts an employee’s activities after termination will be void for being in restraint of trade unless the employer can show the following:
- It has a legitimate proprietary interest that is appropriate to protect;
- The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.
With this in mind, restrictions must be no wider than necessary and a restriction with the sole aim of preventing competition outright is extremely unlikely to be upheld by the court. A legitimate business interest could include protecting trade secrets or the need to maintain a stable workforce.
Post-termination restrictions will be binding if an employer terminates an employees contract in breach of its terms (e.g. they do not give the employee the required notice under the contract). If this happens then the employee will be free from all terms including any post-termination restrictions.
This extends to situations where an employee resigns in response to an employer’s repudiatory breach of their employment contract and are entitled to treat themselves as dismissed (constructive dismissal). In this situation, if an employer is in repudiatory breach, then it will not be able to enforce any of the post-termination restrictions against the employee.
How long can post-termination restrictions last for?
With the exception of restrictions preventing the use or disclosure of confidential information, employers are not able to retain a former employee’s freedom to trade for an indefinite amount of time and should ensure that any such clauses are for a limited time period. The appropriate period will depend on a number of factors such as:
- The seniority of the former employee/what exposure they had to confidential information/trade secrets of the employer;
- The period of time in which the employer’s confidential information needs to be protected. E.g. in some industries information may quickly become outdated and so the former employee’s knowledge will become obsolete;
- The geographical restrictions which apply to the restrictions. I.e. if there is a wide geographic restriction then it will be harder to justify a long restriction;
The length of time that it will take the former employee’s replacement to form relationships with the employer’s clients/suppliers.
How are post-termination restrictions enforced?
Post-termination restrictions are enforced by means of equitable remedies such as an injunction. This is granted by the court who will consider what is fair in the circumstances.
Post-termination restrictions can be a difficult area as each case is assessed on its own facts and our employment solicitors can provide businesses with advice on incorporating post-termination restrictions in employment contracts or whether it would be reasonable to enforce such restrictions