Restrictive Covenants

It is not unusual for employers to insert restrictive covenants into employment contracts or service agreements. The aim of such clauses is to restrict the conduct of the individual after termination.

The starting point is that any contractual term restricting an employee’s activities after termination is void for being in restraint of trade and contrary to public policy, unless the employer can show that:

  • It has a legitimate interest that it is appropriate to protect; and
  • The protection sought is no more than is reasonable.

Legitimate interests include an employer’s trade connections with customers or suppliers and confidential information. The reasonableness of the restriction is judged having regard to the public interest and the interests of the parties. The Tribunal would look into the breadth of the activities restricted and the geographical area covered by the restriction. It would also look into the period of time covered. Restrictive covenants should be set for a limited time period, usually for 3 to 6 months. Restrictions set for a longer period of time are more difficult to enforce. However, in some situations, a restriction lasting 12 months could be deemed reasonable. It will depend on the facts of the case and the drafting of the restrictive covenant.

There are different types of restrictive covenants which may be contained in your contract: Non-solicitation of customers, potential customers
Non-poaching of employees or consultants
Non-dealing with customers or potential customers
Non-interference with suppliers
Non-competition with the business.

If you have restrictive covenants, your options post-termination can be limited. You could be left unable to start work with a new employer for the period of time set out in the contract.

If you have been offered a contract which contains restriction(s) and you are concerned, you should take legal advice. Depending on the restriction, you could ask your employer to amend, shorten or remove it before signing. However, an employer may feel strongly about its inclusion and may not be prepared to alter it. If you have already entered restrictive covenants, you may be able to negotiate the terms upon termination, for example.

Breaching restrictive covenants can be a serious matter with consequences. Your former employer can apply to the courts for an injunction restraining both you, and your new employer, from being in breach of contract. If this is unsuccessful, your former employer could seek damages from you and any future employer for breach of the restrictive covenants. This can prove to be very costly and time consuming.

It is therefore important to seek legal advice before you do anything which might expose you to a risk of a claim by your employer.

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