Restrictive covenants – what are they?

In this post we’ll take our first in-depth look at restrictive covenants in employment law – from an employer’s point of view. We’ll look in our next post at restrictive covenants from an employee’s point of view.

  1. What are restrictive covenants?
  2. What are restrictive covenants useful for?
  3. What problems can restrictive covenants cause?
  4. How can you ensure that the restrictive covenant is valid?

What are restrictive covenants?

Restrictive covenants are contained in (or annexed to) contracts of employment. They are a promise not to engage in certain conduct after they’ve left employment. So, why are they used only after the contract is terminated? The reason why they’re used only after the employee moves on is that during their employment they’re subject to the implied terms of the contract – including, for example, a duty of loyalty towards their employer. This prevents the employee from doing things such as breaching confidentiality or setting up in competition. However, this duty falls away once the employee leaves their employment. Restrictive covenants are therefore used to “bind” the employee after they leave.

An example of a restrictive covenant (we’ll cover the various types in a future post) is a “non-compete clause” where the employee agrees – after the termination of their employment – not to set up in competition with their employer for a limited period of time (i.e. up to 6 months after termination) and for a limited geographical area (i.e. London or the whole of the UK).

What are restrictive covenants useful for?

Ex-employees (particularly those in positions of seniority and responsibility such as managers or directors) have access to a great deal of the resources and talent of their employer. This could potentially be used illicitly by an employee to gain an advantage over their employer when they leave their job. Restrictive covenants prevent ex-employees from (among other things) immediately setting up in competition, revealing certain confidential information to competitors or poaching clients, customers, suppliers or employees of their former employer. This is obviously preferable to their employer and is why restrictive covenants are used on a frequent basis in contracts of employment – even if the employee isn’t privy to important clients or information at the time they sign the contract.

What problems can restrictive covenants cause?

After the termination of the contract of employment it is in the public interest that individuals are free to choose how they utilise the skills and knowledge they’ve learned whilst being in employment. Restrictive covenants are therefore prima facie void and unenforceable as they are in restraint of trade – they seek to stop the individual from using those skills and knowledge. However, if the employer can show that the restrictive covenant satisfies the following tests then it can be used:

  1. The employer has a legitimate proprietary interest that requires protection; and
  2. The protection sought is no more than is reasonable, having regard to the parties’ and the public’s interest

How can you ensure that the restrictive covenant is valid?

The employer will normally have a legitimate proprietary interest that requires protection – their business interest. The key issue is “reasonableness” – the covenant must be reasonable with regards to the nature of the activities it prohibits, the geographical scope of the restrictions, and the duration of the limitation imposed. An example of an unreasonable covenant would be one that sought, for example, to restrict the employee from engaging in a particular act for a year or more – unless, that is, extreme circumstances apply (such as the employee has had access to particularly confidential information or they work in a particularly sensitive industry).