Restrictive covenants are binding conditions that are written into a contract. For example, conditions in a contract identified by a seller to determine what a homeowner can or cannot do with their house or land under particular circumstances.
In Employment law, every business holds information that they deem worthy of protection, certain terms can be implied into employees’ contracts which may provide a certain level of protection for employers whilst the employee’s employment continues. A restrictive covenant is typically a clause in a contract which prohibits an employee from competing with an ex-employer for a certain period after the employee has left the business. The standard types of restrictions which can be used by employers are:
- non-competition covenants – restrictions on the former employee working in similar employment for a competitor;
- non-solicitation covenants – which prevent poaching of clients/customers/suppliers of the former employer;
- non-dealing covenants – which prevent a former employee from dealing with former clients/customers/suppliers, regardless of which party approached the other;
- non-poaching covenants – which prevent an employee poaching former colleagues.
But are restrictive covenants always enforceable?
Certain restrictive covenants will be enforceable, if the employer is able to prove that they are:
- necessary to protect legitimate business interests; and
- of a duration no longer than is necessary to protect those interests.
Restrictive covenants cannot be used as a restraint of trade. If you try to deny an employee the right to make a living in their chosen industry or profession, this will be taken seriously by the court. For example, an employment contract that imposes a blanket ban on a person working for a direct competitor, even for a short period of time, is unlikely to be enforced.
Unreasonable restrictive covenants are void at common law. But what if only part of a covenant is unreasonable? Can the bad be discarded and the good enforced?
The bad part of a covenant may be severed if:
- the unenforceable provision can be removed without the need to add to or modify the wording of what remains;
- the remaining terms continue to be supported by adequate consideration (a criterion that can be ignored in run-of-the-mill cases); and
- the removal of the unenforceable provision does not so change the character of the contract that it becomes not the sort of contract that the parties entered into at all.
Case Study Egon Zehnder v Tillman
- Ms Tillman joined a leading recruitment firm and signed their standard contract.
- In addition to non-solicitation, non-dealing and confidentiality provisions, the enforceability of which were not in dispute, the employee’s contract contained a non-compete restrictive covenant:
“You shall not… within the period of six months from the Termination Date … directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period”.
- Ms Tillman joined in an entry-level position. This could have called into question the enforceability of the non-compete clauses in her contract, because the question of reasonableness is judged as at the time the contract was agreed.
- However, in this case the mutual expectation of the parties was that she would rise quickly into a position of seniority. Ms Tillman was quickly promoted and became a “partner” (although in fact she remained an employee for employment status purposes) and global co-head of the group.
- In January 2017, she announced that she was resigning, and her employment was terminated with pay in lieu of notice.
- A dispute then arose over the enforceability of her six month non-compete clause in the context of her wish to join a rival head-hunting firm based in New York.
- Ms Tillman argued that her non-compete covenant was too wide to be enforceable as the term “interested in” would cover her holding any minor shareholding in a competitor business, even merely as a passive investment.
- There was no exception in her contract which expressly stated that she could hold such shareholdings after termination of employment and not be in breach of restrictive covenant.
Result: Contrary to an earlier High Court decision, the Court of Appeal held that a non-compete restrictive covenant in the employment contract was unenforceable.
Broad phrases attempting to restrict employees from being “concerned or interested in any business…” are often found in non-compete restrictive covenants. This case means that they will not be enforceable unless they are qualified by an exception for minor shareholdings.
Restrictive Covenants are incredibly complex, and for both employers and employees challenging them can be very time consuming and costly. It is important that employers understand what they want to achieve with a Restrictive Covenant, and that the terms and conditions they’re laying out are fair to the employee, while at the same time protecting their own business interests. Employees should be absolutely sure that before they sign an agreement, any Restrictive Covenants are fair, reasonable and justified.
If you would like more information about enforcing or disputing restrictive covenants, contact Stephen Stewart on firstname.lastname@example.org or call him on 01283 526218.