What is a restrictive covenant in an employment contract?
Non-compete agreements are a type of restrictive covenant (often called post termination restrictions) which are found in employment contracts. You can also find them in staff handbooks, offer letters and bonus plans.
How do restrictive covenants work?
Restrictive covenants are contractual clauses which are designed to prevent employees from competing with a business after their employment ends. Consequently they have the effect of limiting the employment options for a former employee. Usually this will be for a defined period of time. Or across a defined geographical area. Non-compete agreements are an example of a restrictive covenant. These prevent an individual from joining a competitor for a specific period of time.
Additionally you will find ‘non-dealing’ clauses. These clauses say that an employee is not allowed to work with certain clients for a period of time after he/she leaves their employment and moves into a new role. This might be a prohibition against working for a competitor business for a period of say 3-6 months after exit within a defined geographical area.
Can a restrictive covenant impact you after your employment ends?
If you have restrictive covenants in your contract they may limit your options when you leave employment. A non-compete agreement could prevent you from starting a new job for several months. These type of clauses can have an impact on your transition into your new job. Therefore you need to understand the impact of these type of restrictions.
Types of restrictions: non-compete, non-solicitation & confidentiality
Clauses like non-compete agreements usually take the form of restrictions against competing with the former employer. But they may also prevent solicitation of Clients or employees of the former employer. Frequently they will also prevent of a breach of confidentiality (either confidential technical information or pricing information).
Employees will often expect to be bound by confidentiality clauses in their employment. However non-compete clauses usually generate most potential disputes because they prevent an exiting employee moving to a competing business. Thereby preventing the competing business gaining a competitive advantage from the information held by the departing employee.
Are Restrictive Covenants Legal?
Restrictive covenants are usually included in a contract of employment. However they can be agreed after employment starts such as following a promotion. In which case an updated contract may be issued. If the employee accepts the new contract that would include agreement to the imposition of the post termination restriction. Signing an employment contract would be evidence of your agreement to the terms. But this can be implied even if the employee did not sign the contract and continued working for the business.
In most of the cases that I see the key question is not whether they have legally consented to application of the restrictions in their contract. If that is the case, I am often asked to advise whether a Court would enforce those restrictions against the employee.
When are non-compete agreements and other post termination restrictions enforceable?
The Courts do not uphold every post termination restriction. Usually restrictions will only be upheld if they protect a legitimate interest of the employer. The Court also needs to believe that they are reasonable. Often the consideration of whether or not the restriction is reasonable is a balance of the duration of the proposed restriction and the geographical area it is designed to cover. A restriction for a smaller geographical area may be enforceable for a longer period than one which is for a wider area. Additional considerations may be the seniority of the employee and the remuneration package they received.
If the Court takes the view that the restriction is unenforceable the clause will be void and will not be binding on the employee.
Strategies for dealing with post termination restrictions
The most simple (and cheapest) method of dealing with a post termination restriction would be to avoid agreeing to anything which you are not happy to accept when you leave your job. You are not legally obliged to accept post termination restriction clauses in your employment contract. Therefore it is possible to negotiate with your employer at the point when you join to remove or reduce the impact of any post termination restrictions.
This can be a productive way to manage the impact of any restrictions because you will be in a strong negotiating position before you accept the role. It may be possible to agree the restriction with a reduced geographical scope.This would reduce any impact on you when you leave and still offer some protection to the employer.
I often assist with negotiations during the recruitment phase, or when a new contract on promotion is offered. It is important to understand the “risk” to both the employee and the business to ensure that these negotiations are concluded in result which is acceptable to both parties. After many years of advising in industry and many private Clients I am highly experienced in these negotiations.
Getting advice on post termination restrictions before handing in your notice can be important to understand whether any restrictions may be upheld by a Court. If you are leaving via a settlement agreement it may be possible to include clauses which release you from some or all of the post termination restrictions. Please refer to my articles about settlement agreements for further information about that process https://www.carlatkinsonlaw.co.uk/unlocking-the-secrets-of-severance-and-settlement-agreements/
Why you should speak with me
Contact me if you have post termination restrictions in your employment contract which are causing you concern. It will help to understand your level of risk. Additionally I can advise you on the best strategies to reduce the impact of the restrictions. I have many years experience of advising businesses and employees on post termination restriction clauses across a wide range of commercial and industrial sectors. Therefore I can provide pragmatic support which will save you time and reduce the stress associated with leaving your job or losing a key employee.
Contact me via my online enquiry form to arrange a no-obligation conversation. We an arrange a follow up appointment virtually or in a face to face meeting.
Call me now on 0330 223 3288
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