Protecting your most valuable assets- restrictive covenants in an employment context
posted 28th November 2019
The end of an employment relationship can be stressful for both employee and employer. This stress can become two-fold if it is found that the former employee has breached their restrictive covenants and has, for example started working for a competitor, or encouraged customers or clients to move over to a competing company with information that provides the former employee with an unfair advantage. This article provides guidance on how to protect your business interests and what potential recourse an employer has in the event of a breach.
Starting Point
The starting point in relation to post-termination covenants is that they are prima facie void for being a restraint of trade; however, they can be enforceable if they go no further than is necessary to protect the legitimate interests of the business.
Restrictive covenants are assessed on a case-by-case basis, however, the following principles are taken into account:
- Is the restrictive covenant reasonable? (taking into account the interests of the parties and the public interest).
- Is it protecting a legitimate interest? To be enforceable, a restrictive covenant must be designed to protect a legitimate proprietary interest of the employer for which the restraint is reasonably necessary. Legitimate interests include an employer's trade connections with customers or suppliers, confidential information and maintaining the stability of the workforce.
- Does it solely restrict competition? Competition can never be the sole aim of a restriction. The covenants must instead be constructed in a way that protects confidential information or prevents an unfair advantage.
- Are the restrictions wider than necessary? They must only provide adequate protection.
Because of these principles, it is really important that any restrictions in your employment contracts are bespoke to what is important to the business and the interests that need protecting. There are different types of restrictive covenants, which include:-
Non-solicitation - for example, a covenant restricting a former employee from actively contacting a customer or client of their ex-employer for a set period.
Non-poaching - for example, a former employee would be unable to poach or employ other workers from their previous workplace for a set period.
Non-dealing - a former employee would be unable to provide goods or services to a customer of their ex-employer for a set period.
Non-compete - a former employee would be unable to join a competitor or set up a competing business for a set period.
Non-binding if in breach
If an employer terminates an individual's employment contract in breach of its terms (for example, without giving notice), the individual is free from any terms of the agreement that are intended to survive termination, including post-termination restrictions.
In a constructive dismissal situation, the employee resigns in response to the employer's repudiatory breach of contract and is entitled to treat themselves as dismissed. One of the effects of a constructive dismissal is that, as a result of the employer's repudiatory breach, it cannot enforce any of the post-termination restrictions contained in the contract of employment, or any other terms that are intended to survive termination.
Is there anything an employer can do to impose new restrictions or reinforce the restrictions in their contract on termination?
Post-termination restrictive covenants are often included in settlement agreements signed on, or shortly after, termination of employment. These may restate the covenants found in the employment contract, or they may introduce additional covenants that take into account the circumstances surrounding the termination and, perhaps, the fact that the employee is likely to be joining a competitor. Any restrictive covenants must be supported by consideration to be enforceable.
These restrictions, though still subject to the principles as mentioned above, can be more enforceable due to the parties' more equal bargaining positions and the fact that the employee has to take legal advice on the agreement, including any restrictive covenants.
What if a former employee breaches a restrictive covenant?
If the restrictive covenants are enforceable and the former employee has breached any of these then there are several options for an employer to consider:
- Applying for an interim injunction/ springboard injunction;
- Pursuing a breach of contract claim;
- Requesting that the employee signs contractual undertakings or undertakings to the court. An undertaking to the court is stronger than a contractual undertaking as if a former employee breaches their undertakings to the court they will be in contempt of court for which there can be criminal sanctions;
- Taking action against a third party who has benefitted from the former employee's breach.
Which avenue is best, if any, will be fact specific and we strongly suggest you take legal advice. It is also worth noting that the costs and management time involved with pursuing any of the above can be great and so it is for the company to weigh this up against the interests that they are seeking to protect. We can provide guidance on this should the need arise.
The information contained in this article is for information purposes only and is not intended to constitute legal advice. For advice on restrictions in an employment context or if you think a former employee is in breach of their restrictive covenants or confidentiality provisions, contact our employment team at employment@greenawayscott.com or call us on 029 2009 5500.
