Are Restrictive Covenants Legally Binding?

Restrictive covenants can be legally binding as long as they are not in restraint of trade. This means that the restrictive covenant must be reasonable and protect a legitimate business interest which is appropriate for it to protect. In an employment context, restrictive covenants are less likely to be enforceable as there are much stricter rules for them to adhere to.

The restrictive covenant must be necessary to protect an employer’s confidential information or contracts but should be no greater in scope than what is required for a legitimate business interest. A restrictive covenant which primarily aims to restrict competition will not be enforceable.

Types of Restrictive Covenants

• Non-poaching

A non-poaching clause aims to prevent you from poaching any of your former colleagues after you have left your employer and convincing them to join a new business, whether that is your business or another employer.

• Non-employment

Non-employment clauses are similar to non-poaching clauses but more specifically deal with preventing you from being involved in the recruitment of employees from your former employer.

Non-poaching clauses are generally easier to enforce than non-employment clauses; they seek to limit the decisions of third-party employees. Generally, these clauses are limited to restricting the poaching or employing of senior staff members. However, for a small business, it may be reasonable to restrict a former employee from poaching or employing any staff members.

• Non-solicitation

A non-solicitation clause seeks to prevent you from actively contacting any of your former employer’s customers, clients, or prospective clients. However, you do not always need to be the one who initiates contact it depends on the specific circumstances including the influence you have over a customer. Typically, these restrictions only apply to those customers or clients with whom you have had significant contact during the last 6-12 months of your employment.

• Non-competition

Non-competition clauses seek to prevent you from working for a competitor or setting up your own company for a certain period of time after the termination of your employment.

Non-compete clauses are the most onerous type of restrictive covenant but can also be the most difficult to enforce. These clauses can generally only be enforced if they are clearly defined, reasonable and justifiable so it is extremely important that they are worded correctly.

• Non-dealing

Non-dealing provisions restrict you from providing services or goods that your former employer provides to their customers. These provisions apply even where you have taken no active steps.

Non-dealing provisions clauses are quite difficult to enforce as they aim to restrict the decision making of a third party as well as you as a former employee. The reasonableness of these types of clauses will depend on the intention at the time the restriction was agreed upon, not at a later point in time.

• Confidential Information

These clauses restrict you from disclosing or misusing confidential information that belonged to your former employer. Nor can you use any confidential information for your own benefit.

All contracts of employment have implied terms regarding the use of confidential information. However, it is advised that the contract also contain express terms as the specific information considered to be confidential information can be more clearly defined. Confidentiality agreements can be standalone agreements or included in an employment contract.

What is Garden Leave?

An employer will often place you on garden leave when you have given notice to terminate your employment. It seeks to prevent you from attending the workplace and working during your notice period and allows you to remain at home whilst still receiving your full salary and benefits.

Garden leave is generally used in combination with restrictive covenants and there must be an express clause in your employment contract which enables your employer to place you on garden leave. The benefit to your employer of having a garden leave clause in your contract is that it prevents you from commencing employment with a potential competitor and allowing your employer to phase you out of the business so that any information or contacts you might possess will become unusable.

Read our guide on garden leave in the UK

Are Restrictive Covenants Enforceable?

Restrictive covenants are deemed enforceable as long as they are being used by the employer to protect a legitimate business interest. The scope of the restriction should not go further than what is reasonable to protect these interests.

This kind of interest would include confidential information, client and customer relationships, and relationships with suppliers among others. The law regards any restrictive covenant that is deemed to be in restraint of trade as void due to its potential anti-competitive nature.

The restriction should include as much detail as possible including the type of work being restricted, the length of time post-termination that the restriction applies and the specific geographical area, where you carried out activities for your employer, which is now being restricted. Worldwide restrictions are possible if your employer is a global organisation, but the restrictions must be justifiable.

Whether these clauses are enforceable will always depend upon the specific factual circumstances of each case, however, the following principles will usually be considered:

• Any absolute attempt to deny an employee the right to make a living in their chosen profession or industry is likely to be struck out as unenforceable by the courts.

• The clause cannot be any more restrictive on the employee than what is reasonably necessary in the specific circumstances to protect the employer’s business. If the clause is too restrictive then it is unlikely to be enforceable.

• Your employer must be able to show that they have a legitimate business interest which requires protection and cannot seek to restrict you just for the sake of it. They must be able to show that your potential actions could have a negative effect on their business.
• The clause must only be viable for a limited time, usually 3,6,9, or 12 months. They cannot be indefinite.

• What is considered reasonable will depend upon your position within the business. It is more reasonable to restrict the actions of senior employees who are in regular contact with the customers and clients of the business than it is to restrict the actions of a junior employee. However, even if you are not in a senior position, restrictive covenants are more likely to be upheld where your employer can show you have a significant personal connection with important customers.

How Long are Restrictive Covenants Valid For?

In general, restrictive covenants are valid for 6 to 12 months but they can also be 3 months or over 12 months depending on your seniority. Typically, an employer will find it difficult to justify a restrictive covenant of over 12 months however where you are a senior member of staff with access to confidential information this may be considered reasonable.

Situations Where Restrictive Covenants are Not Enforceable

A restrictive covenant will not be enforceable at a later date if it was unenforceable at the time the contract was entered into. This often occurs when an employee is hired for an entry-level role and rises through the ranks. Here, the restrictive covenants within their contract are considered too onerous at the onset of their employment and cannot be enforced despite the increase in seniority the employee might now have.

For this reason, upon promotion, your employer may ask you to give renewed acceptance of an old covenant or request that you sign a new contract of employment containing updated restrictive covenants. It may be difficult for your employer to enforce a restrictive covenant if you have not signed your employment contract, particularly if you are a senior employee.

Additionally, restrictive covenants should be consistent among employees who are on a similar leave and have access to the same confidential information. If there is not it is unlikely that your employer will be able to enforce these covenants as they will be unable to argue that they will suffer losses if the restrictive covenants are not uniformly applied.

Can my Employer Retrospectively Add Restrictive Covenants?

It is much easier for your employer to introduce restrictive covenants into your contract of employment at the onset of your employment however they can retrospectively add (or amend) restrictive covenants provided you give consent. If you refuse to provide consent your employer has two options:

• They can unilaterally impose the change. If your employer imposes the change without your express consent, you may have a claim for constructive dismissal. However, you should note that you can be deemed to have provided implied consent if you do not clearly object to the change.
• They can terminate your employment and offer re-engagement on new terms. This is a particularly risky decision on the part of your employer as you may have a claim for unfair dismissal. You should seek legal assistance to determine whether your employer was reasonable in this action.

For the addition of restrictive covenants to be legally binding your employer must provide some form of consideration to you for agreeing to the new provisions. This consideration could include a bonus, a pay raise or any other kind of payment made to you.

What Happens If I Breach a Restrictive Covenant?

The consequence of breaching a restrictive covenant is not automatic, your employer will need to take legal action against you. If you have breached a restrictive covenant your employer can apply to the court to obtain an injunction. This means that you must return or destroy any confidential information that you have in your possession. The court will also request that you cease any contravening actions and set a hearing date to hear the full evidence.

If you are still employed your employer could be entitled to terminate your employment contract with immediate effect and without any payment in lieu of notice. Your employer might also decide to claim damages for the breach and will need to quantify the loss arising from the breach. If they are successful, you will be responsible for paying for their loss of profits or opportunities caused by the breach.

Can a Restrictive Covenant Be Enforced in the Case of Dismissals and Redundancies?

A restrictive covenant will generally commence from the last date of the employee’s employment. The reason for the dismissal or whether it is fair or not is irrelevant. If the restrictive covenants are deemed enforceable, they will be applied regardless of the reason.

The exception is where there has been a breach of the contract of employment by the employer such as in a wrongful dismissal case or where an employee has resigned and claimed constructive unfair dismissal due to their employer’s breach. In such cases, contract provisions that are intended to continue post-termination, including restrictive covenants, are unlikely to be enforceable.

Restrictive Covenants and TUPE

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006, also known as TUPE, employees who are being transferred keep any and all terms and conditions of their employment. The buyer or new employer inherits those terms and conditions, including any restrictive covenants contained within.

Here problems can arise as often restrictive covenants are tailored to the needs of the original employer and may not cover those interests which the new employer seeks to protect. Therefore, in a TUPE transfer situation, it is advised that one seeks specialist advice as to the scope of the restrictive covenants.

Do I have to Accept a Contract with Restrictive Covenants?

You are entitled to refuse to accept a contract with restrictive covenants however they are standard in contracts of employment. You may wish to ask your employer to either change or remove the restrictive covenants however your employer may refuse. Ultimately this could result in your employer withdrawing the job offer.

If you commence in your role but do not wish to accept the restrictive covenants stipulated in your contract, you should inform your employer in writing immediately. Otherwise, you may be seen to have given implied acceptance.

What Happens if I Ignore the Restrictive Covenants in My Employment Contract?

If you decide to ignore your restrictive covenants upon leaving your employment, you run the risk of your former employer commencing legal proceedings against you for breach of contract.

Therefore, you should think carefully before acting in breach of any of your restrictive covenants and consider seeking legal advice if you have any concerns regarding your restrictive covenants.

How Redmans Solicitors Can Help

Redmans Solicitors are employment law specialists and could help solve your query. Our solicitors are here to guide and advise you on a variety of employment issues including unfair dismissal, settlement agreements, pregnancy discrimination and workplace harassment.

Contact us today if you have any further questions or want help with your parental leave rights. Get in touch with us by:

• Calling us on 020 3397 3603
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