Restrictive covenants offer protection for employers and employees, but they are also a legal minefield, says GIORGIO VENTISEI
One area of change that has emerged from the pandemic is the relationship between employer and employee as many have made decisions to leave their roles for new ventures. Anything from starting a new business to moving to a more lucrative position with another company. This shift has brought into sharp focus the subject of restrictive covenants.
In short, a restrictive covenant is an obligation imposed on a party to an agreement preventing said party from doing something. They often feature in share purchase agreements and commercial contracts but by far the most common examples are those found in employments contracts.
These covenants can affect anyone in whatever line of work but in the main they are likely to have the most significant impact for those who have a particular skill-set or expertise, or are senior figures in the business.
Vacancies in the UK are at record highs and there is great competition and demand for skilled and experienced workers, so it is not a surprise that we have seen a marked rise in instructions from both businesses and employees in relation to restrictive covenants.
When faced with the small print of their employment contract, the refrain from many employees of “well, I thought restrictive covenants were unenforceable” is not uncommon.
In short, it depends on the circumstances. And this, of course, is almost certainly the first stage at which a dispute can arise.
There are a number of areas in which these covenants can be of critical importance, but among the most important concern restrictions on working for a competitor, restrictions of solicitation of customers and the subject of private and confidential information.
Employees leave for other companies. It happens. They should be extremely wary of any such restriction in their contract that limits this.
Such a restriction could well be enforceable if the employer can show that the restraint is reasonable. A court could consider aspects such as length of restraint, the geographical area to which the restraint applies, the type of role the employee undertakes, access to confidential information, or their seniority. It is not unknown for a court to find “world-wide” restrictions enforceable but also refuse to enforce a restriction spanning a five mile radius.
Importantly, both employers and employees should be extremely careful when it comes to “non-compete” restrictions as enforceability very much depends on each individual situation.
It is also worth noting that the point in time at which restrictions are judged is the time they were entered into, regardless of the circumstances prevailing at the time a business is trying to enforce them.
Restrictions on solicitation of customers can also be a frequent source of contention – such restrictions will often prevent former employees from contacting customers with a view to securing them for their new employer.
‘There are, of course, duties implied into every employment contract which include the duty not to disclose company secrets’
Again, a court will have an eye on reasonableness. A key consideration will be the length of time the restriction is in place, as will be the customers against whom the restriction applies.
Ultimately, it will not be enforceable if the restriction goes further than what is necessary to protect the employer’s legitimate interests.
Finally, (but by no means limited to!), we have the area of confidential information. The first thing to note is that there are, of course, duties implied into every employment contract which include the duty not to disclose company secrets. It’s a given and, as such, theft that distribution of a company mailing list, for example, would be a grievous breach of contract and can be robustly prevented.
Whilst the courts are generally more accepting of these clauses, there are limits. Although a prize-winning mixologist might be prevented from sharing a secret recipe for one of the company’s famous cocktails, they would not be stopped from showing off their skills at a new bar. Equally, a car engineer may not share some new technology developed at a previous employer, but they could apply their skills to new projects with their new employer.
The law around restrictive covenants is not easy to deal with; it can be vague at times, and highly complex.
Whether you’re an employer or employee, obtaining the best professional advice at the outset can save both a huge amount of time, stress and indeed cost. One definition of covenant is simply, agreement. The secret is in the name.
Giorgio Ventisei is a solicitor in dispute resolution at Aberdein Considine