Restrictive covenants – is your business adequately protected?

By Nathan Combes, senior associate at Lupton Fawcett

Customer relationships, goodwill and confidential information often comprise some of a company’s most important and valuable assets. It’s hardly surprising therefore that company’s will often want to take steps to try and prevent the misuse and abuse of those assets.

For most companies a particular area of concern relates to departing or former employees who may try to use information, documents and customer connections that were established or came into their possession during the continuance of their employment in order to set up a competing business or for the benefit of a new employer; in both cases gaining an unfair competitive advantage. This can seriously harm the former employer’s business.

There are a number of steps that employers can take to minimise the risk of a departing or former employee from harming their business. Some of these steps are practical and procedural (e.g. limiting access to confidential information and preventing key customer relationships from becoming vested in a single employee). However, these steps, on their own, will rarely be sufficient and employers often seek to rely on restrictive covenants in order to bolster their protection.

Restrictive covenants are contractual clauses that seek to limit or prevent the activities of a departing or former employee. There are various types of restrictive covenant. The most common types include non-solicitation, non-dealing, non-poaching and non-competition; so for example a non-solicitation restriction will prohibit a departing or former employee from contacting customers with a view to obtaining their business whilst a non-competition restriction will prevent the employee from joining a rival employer for a defined period of time after termination.

There is a commonly held misapprehension that restrictive covenants are ‘not worth the paper they’re written on.’ However, from a legal perspective, the reality could not be further from the truth. The misapprehension concerning the enforceability of restrictive covenants stems, in most cases, from a failure on the part of employers to ensure that their restrictive covenants have been properly drafted, taking the circumstances of their own particular business into account.

There are a number of key practical steps that employers can take when seeking to rely on restrictive covenants. In particular:

• It’s important to ensure that restrictive covenants are incorporated into the contract of employment (ideally at the commencement of an individual’s employment).

• Make sure that the document containing the restrictive covenants has been signed by the employee and that you have retained an original signed copy.

• If you’re introducing restrictive covenants part way through the employment relationship or you’re updating existing restrictive covenants make sure that the employee has received a tangible benefit in return; this might be a pay rise or other enhanced contractual benefit.

• Strict rules apply to the enforceability of restrictive covenants. Accordingly, always take professional legal advice in connection with the wording of restrictive covenants and their intended duration.

• Understand that when considering the reasonableness of restrictions, the court will only have regard to the employee’s job title and seniority at the time they were entered into. It’s vital for this reason that a new contract of employment containing fresh and updated restrictive covenants is issued whenever there is a change to a particular employee’s role, status or duties.

For further help or advice, please contact Lupton Fawcett’s senior associate, Nathan Combes, on 01904 561449 or Nathan.combes@luptonfawcett.law

Close