Restrictive Covenants in Employment Contracts

Restrictive Covenants in Employment Contracts

At The Jonathan Lea Network, we can provide tailored advice and negotiation services for restrictive covenants in employment contracts, consultancy agreements, and self-employment matters. 

Whether you are an employer seeking to protect your business or an individual requiring clarity on your post-termination obligations, we’re here to help you maintain compliancy with your agreements, and protect your business from any potential and subsequent breaches. 

What are Restrictive Covenants?

A restrictive covenant is a contractual clause that is designed to prevent employees, directors, or consultants from competing with their ex-employer for a certain period of time after the employee has left the business. Restrictive covenants can also be used to prevent the ex-employee from soliciting or dealing with customers of the business by using their knowledge of those customers gained during their time at their prior employment. 

The need for restrictive covenants in employment contracts comes as a means of filling in the gaps of implied contractual terms. Although implied terms may provide a measure of protection for the employer during an employee’s employment period, restrictive covenants come into play to protect an employer after this term of employment has ended. These are particularly important where information that the employee may hold is commercially-sensitive, high value and of detriment to the business if used by a competitor. 

The most common types of restrictive covenants are: 

• Non-solicitation covenants
• Non-dealing covenants
• Non-poaching and non-employment covenants
• Non-compete covenants
• Confidential information
• Garden leave

Restrictive covenants are not enforceable automatically given that they can be drafted too severely or widely. Instead, the employer must be able to prove that they are justified and sufficiently narrow to be reasonable and therefore enforceable. A court will not enforce a covenant or clause that is poorly drafted, and can result in such restrictions becoming void if too onerous or restraining of trade.

Requirements for a Restrictive Covenant

In the UK, a restrictive covenant’s enforceability depends on its reasonableness. The reasonableness test judges whether the clause is proportionate in its restriction with regards to:

• Scope;
• Duration;
• Geographical reach; and
• Protection of a legitimate business interest, including: confidential information, trade secrets, relationships with clients, and stability of the workforce.

This may require evidence of any relationship between the employee and such information that is trying to be protected, and so the clause must be relative in scope to the employee’s position within the business. 

On top of these, there are other considerations to note with enforcing restrictive covenants:

1. A restrictive covenant will not be enforceable at a later date if it was unenforceable when the contract was first entered. This means that if an employee was hired at junior level and the restrictive clauses were too onerous to be enforceable at the time they were entered into, the employee cannot grow into the clauses as they become more senior.
2. There must be consideration in return for entering a restrictive covenant – consideration means “some real monetary or other benefit,” such as the offer of a promotion or general employment.
3. Employee contracts should be consistent.  If there is a lack of consistency between employee contracts, particularly if such employees are on a similar level with access to the same information, it may cause issues when enforcing certain clauses. If their restrictive covenants are not comparable or different entirely, it is difficult to argue as an employer that you will suffer losses if the covenants are not uniform for employees at the same level.

Non-solicitation and non-dealing covenants

Both non-solicitation and non-dealing clauses concern a customer base or client following a former employee to their new employment. Non-solicitation deals specifically with persuading clients to move their business, and non-dealing concerns working with former clients in a competing role. These restrictions should both only apply to clients with whom that employee has had meaningful (known as “material”) contact with in their recent employment, usually within 6 months to a year.

Non-dealing can also apply to prospective customers and clients.

An example of a non-solicitation clause you may find in your employment contract is:

The Employee agrees that for a period of 6 months following the termination of their employment, they shall not, directly or indirectly, on their own behalf or on behalf of any other person or business, solicit or attempt to solicit the custom of any client or customer of the Company with whom the Employee had material contact during the 12 months preceding the termination of employment, where the purpose is to provide goods or services that compete with those of the Company.

Non-poaching and non-employment covenants

Both non-poaching and non-employment clauses concern former employees approaching the employee’s new business. Non-poaching prevents an employee persuading their former colleagues from joining their new place of employment, and non-employment discuss the prevention of an employee from being involved in the recruitment of any former employees. Both restrictive covenants are limited to colleagues with whom the employee has had recent meaningful contact with. 

Here is an example of a non-poaching clause common in employment contracts, particularly for senior employees:

The Employee agrees that for a period of 6 months following the termination of their employment (however caused), they shall not directly or indirectly induce or attempt to induce any employee or contractor of the Company, with whom the Employee had material dealings in the 12 months prior to termination, to leave their employment or engagement with the Company, or accept employment or engagement with any other business with which the Employee is involved. 

Non-compete covenants

Non-compete clauses are the most restrictive types of restrictive covenant. These prevent an employee joining a business in a role that competes with part of or the whole of their former employer’s business. Due to difficulty with policing confidential information and non-poaching clauses, non-compete clauses are used as a failsafe to protect such confidential information in a more effective way. However, they as a result can be harder to enforce due to their severity, compared to the enforcement of a confidential information or non-solicitation clause. 

Confidential Information Agreements

Restrictive covenants in the form of Confidentiality Agreements will relate to confidential information, preventing a former employee from misusing, disclosing or exploiting confidential information belonging to their former employer in their new place of employment. Confidential information and trade secrets usually constitute a legitimate business interest, one of the necessary components to upholding the enforceability of a restrictive covenant. 

Garden Leave Clauses

Although not technically a restrictive covenant, garden leave is a common clause used once an employee has given notice to prevent them from attending their workplace and working during this period, whilst also not starting their new role yet. This allows an employee to spend their entire notice period at home but still receive full salary and benefits. For an employer, the benefit of enforcing garden leave is so the employee is unable to engage with any other employment with a competitor for the duration of their notice period. Garden leave must be an express clause in the employee’s contract, subject to test of reasonableness regarding its duration. 

Each of these clauses serve a specific purpose and are used to prevent important information being used and passed on by former employees, or even those employees exploiting a customer base, trade connections or business opportunities from their former employment. 

Restrictive Covenants for Employers

As an employer, including these clauses within an employee’s contract are key for clarifying to that employee what activities or information is restricted, how long that duration of restriction is, and ultimately prevents former employees from exploiting their ex-employer’s customer base, trade connections and stability of its workforce.

With regards to the situation where an employee has risen from junior to senior, a solution can be for the employee to provide new acceptance of those old restrictive covenants on a promotion, or even sign a new employment contract with new covenants.

If an employer has reason to believe an employee has breached a restrictive covenant, the most common remedy can be an injunction, whereby the application requests the employee “deliver up” or destroy any confidential information they are believe to hold, as a pre-emptive measure before a trial. 

Employers can also claim financial remedy or damages for a breach of a restrictive covenant, but this requires the employer showing some loss resulting from the breach. This usually takes the form of a loss of profits on contracts or opportunities redirected by the former employee.

If the employee is found to have been induced by their former employer’s competitor into breaching a restrictive covenant, the employer may instead sue the competitor, particularly as a company will be more likely to have the financial resources to pay damages awards than the employee themselves. 

Employers should also consider what they want to achieve by claiming against a former employee, and whether it serves their commercial objectives. By pursuing an employee for breach of a restrictive covenant, there may be commercial implications on a business’s reputation and publicity, client relationships and workforce morale. Such proceedings will also incur large legal costs, particularly if the employer is unsuccessful in the case, and a lengthy amount of time. Ensuring that you hold credible and concrete evidence of any wrongdoing by the employee will create a stronger argument and better case for an allegation of contract breach.

If you are employing a new employee from a competitor, you must ensure that they have not breached any restrictive covenants in their former employment contract, to avoid the risk of potential action against you the new employer in lieu of the employee. 

How We Can Help

We can advise on whether and which types of restrictive covenants are necessary for each level of employee in your business, and what conditions they should uphold.

We can help your business protect itself against these potential scenarios through clear drafting of such clauses to ensure they qualify as reasonable to be enforceable when onboarding a new employee, updating existing documentation, or terminating an exiting employee’s contract.

We have experience of representing businesses at employment tribunals and can help you understand all of the options available to your business where tribunals are concerned. We are prepared to help you represent your business if you wish to fight the claim, or we can assist with negotiations to reach an early resolution outside of court. 

We can advise on any potential breach of a restrictive covenant to better assess whether action is necessary.

We will work closely with you and your business to ensure you are legally compliant where seeking to include restrictive covenants in your employment contracts.

We can assist you in contract negotiation for both new and current employees.

Restrictive Covenants for Employees

As an employee, a restrictive covenant may limit your options when leaving employment in a variety of ways. This can be in the form of garden leave, where the clause may inhibit the starting of new employment for a period of time, or non-solicitation, which prevents an employee persuading clients to move their business from the former employer to themselves. 

Outside of a formal employee, other types of workers may or may not be affected by restrictive covenants:

• Casual workers – generally not affected
• Partners and LLP members – may be bound by more onerous restrictive covenants and “waiting room” clauses 
• Consultants and Contractors – non-competes are rare but others may be used 

Casual Workers

Since December 2022, there has been a ban on exclusivity terms for low-earning workers, making it impossible to enforce non-compete clauses against them. An employer enforcing a restrictive covenant on a casual worker, such as someone on a zero-hours contract, can be problematic as there is an inherent lack of continuous employment relationship, and potential for confusing their employment status. 

Waiting Room Clauses and Team Moves

For a partner or senior LLP member, waiting room clauses can be used alongside restrictive covenants in an employment contract. These clauses limit the number of partners who can leave within a certain space of time, and once that limit has been reached in that calendar or financial year, any further partners wishing to leave have to wait until the next period of time begins. 

Waiting room clauses are usually used to prevent an entire team from moving from the same business at the same time in a “Team Move”. Recent cases have shown an increased willingness by courts to uphold restrictive post-termination covenants in favour of employers in team move and poaching scenarios. 

These clauses however have been debated as to whether they count as restrictive covenants or not, which would impact their enforceability if the latter. It is therefore important not to solely rely on this clause as an employer, nor use it unreasonably. 

Consultants and Contractors

Like the guidelines around consultants, for those who are self-employed or contracted by a business, knowing what is binding and what might not be can be confusing and vary from business to business. Generally, the courts are more wary of enforcing covenants in these situations and will scrutinise a restrictive clause more strictly using certain criteria: 

• Absence of employer-employee relationship – less likely to uphold
• Level of control – if you are heavily controlled or integrated into a business, the relationship may resemble employment and clauses more likely to be upheld
• Genuine business-to-business relationship – if you are operating via a company, a covenant may be more likely to be upheld
• Reasonableness tests – duration, scope, geographical reach, and protecting legitimate business interest

Despite this grey area, the chance of a restrictive covenant in your contract being upheld is still possible. Before entering a contract, it is worth understanding how non-compete clauses, for example, will impact your relationships with client, and how many you may be excluded from working with if you move on from your current employment relationship. Negotiating your contract with regards to duration, geography, scope and even sector – proposing that only direct competitors are off limits – can be crucial to ensuring your client relationships and workflow remains consistent from place to place. 

Redundancy Situations

If you have been made redundant, your former employer is still entitled to impose your restrictive contract covenants on you. Although the employer may no longer need someone in your role, that does not mean that the confidential information you may hold is also no longer needed. Non-compete clauses will more than likely be upheld in these types of situations. 

Moving to a Competitor

If you are planning to leave to move to a competing employer’s business, our lawyers at The Jonathan Lea Network can help you navigate the complex and restrictive rules surrounding your departure and move. Instances such as team moves, customers following you and potential poaching of your former colleagues to your new employment can all bring the potential for legal action, such as an injunction, being brought against you by your former employer.

Customer Base and Goodwill

It may be the case that, without your prompting, clients that you have worked with over long periods of time and have built working relationships with may decide to follow you to your next place of employment. Although not your doing, this may cause you issues with your former employer particularly if a non-solicitation or non-dealing clause has been included within your contract. Ensuring that you do not provoke or induce such customers to move with you will be key to defending any allegations of soliciting or dealing with your former employer’s customer base. 

How We Can Help

At The Jonathan Lea Network, we can review your contract of employment and help you determine what you may be liable under. 

We can advise you on how to navigate and manage your move from one job to the next avoiding the potential for breaching restrictive covenants and the danger of legal action. 

We regularly advise on reviewing the enforceability of restrictive covenants, taking into account all reasonableness and supporting criteria no matter your role.

We can assist you with negotiating a restrictive covenant’s removal or reduction in scope to ensure your future employment is not impacted.

We can help you understand or dispute any allegations of breaching a restrictive covenant.

We are experienced in defending and enforcing claims relating to breaches of restrictions in employment tribunals, and can help you understand all of the options available to you where tribunals are concerned. We will help you if you wish to fight the claim, or we can assist with negotiations to reach an early resolution outside of court. 

If you are engaged on a self-employed contract, we can help clarify your status and advise whether you are bound or free from restrictive covenants in your contract.

We can assist you in contract negotiation.

Get In Touch

Whether you are an employer, future/exiting or self-employed employee, we aim to deliver clear, commercially focused legal advice to support your contract formation and employment disputes. 

If you would like to speak to our Employment Law team to receive tailored advice regarding your employment contracts, consultancy agreements and breach of contract disputes, please do call or email us today.

Get in touch with our Employment Law team

Call us on +44 1444 708640

Email us at wewillhelp@jonathanlea.net