Top 5 Tips for Avoiding Problems with Restrictive Covenants
2 July 2019 by Guest Author
Various issues can be caused by the existence of post-termination restrictive covenants in employee’s contracts of employment. Experience of problems with these are becoming increasingly common.
Employment contracts often include express restrictive covenants. They seek to prevent employees from carrying out particular acts once employment is terminated.
Examples include clauses which prevent solicitation of employers’ customers, or which prevent poaching of the employers’ staff. They also manifest by requiring an employee to keep certain information confidential post-termination.
The law treats restrictive covenants in employment contracts uniquely. For example, it is less likely that a restrictive covenant placed into an employment contract would be enforceable when compared against a similar covenant put in a supply agreement.
The Courts are keen to ensure that employers do not act in such way as to restrain trade, save in circumstances where an employer seeks to protect a legitimate proprietary interest and the protection sought is no more than is reasonable to grant that protection.
It is important that employees consider the operation of such clauses at every stage of their employment, including when their employment is terminated. This will avoid unwelcome surprises when it may be too late to negotiate more reasonable or enforceable terms. .
For an employee, careful consideration of the terms contained in a contract of employment, prior to signing it, is an obvious advantage. Understanding the likely enforceability of terms is likely to lead to legal advice being sought.
Legal advice would assist any negotiations between the parties and would be likely to lead to more reasonable terms being counter-offered and/or an employer more closely considering key clauses in the contract, which, but for important considerations around them being had regard to, might have led to an employer’s own terms being held to be unenforceable.
Top tips for employees are as follows:
- (1) Give proactive consideration to the scope and application of covenants prior to entering into a contract of employment – this is key.
This is your first, and best, opportunity to consider what could happen if you leave your employer’s employ and the post-termination restrictions in your contract are upheld. Nobody enters into an employment relationship with an expectation about how and when the relationship might come to an end, however, ensuring that as many eventualities are considered at the outset as can be , will help to make sure that there are no unwanted surprises later.
The importance of entering into a contract of employment having fully considering the terms cannot be understated.
Pre-contract is usually the optimum time to negotiate better terms. Even small tweaks to defined terms or variations made to things like the duration of a restrictive covenant might provide some substantial advantage at a later date.
- (2) Considering the interests which your employer might want to protect may help you understand the context in which the protections are sought and may help you form a view about what is reasonable in the circumstances.
An employer will be keen to protect its relationship with key customers, clients and suppliers in addition to its goodwill.
Other protections sought may also include protection of trade secrets and confidential information and the integrity of the workforce.
- (3) Considering the scope of the restrictive covenants will tell you whether the terms are reasonable.
In most situations, it is clear that employees should not be required to sign up to open-ended restrictions. The scope of key restrictions should be limited to a reasonable duration, there should be a relationship between any prohibited employee activities and realistic damage which could be caused to a proprietary interest and be limited to a geographical area in the case of radial clauses. .
- (4) Ensure that you consider any breaches by your employer during the currency on your contract.
Consideration around the impact on you of your restrictive covenants does not end once the contract is signed by the parties. The protection of a restrictive covenant might be lost by your employer if a serious breach of contract is committed by an employer. In these circumstances, you should seek legal advice to assess the risks that might be inherent if you were to treat the restrictive covenants as no longer binding.
- (5) If you are asked to enter into any additional restrictive covenants during the currency of your employment, consider whether there is consideration offered by the employer that makes it worthwhile for you to do so.
As with any contract, in order to be enforceable, there should be consideration for the contract. That is, something of value passing between the parties.
If you are promoted within a company, the company might also require you to sign up to more onerous post-termination covenants. You should accept these variations to your contract without careful consideration and sound legal advice.
If you wish to be advised about post-employment restrictive covenants please contact us by calling 01206 700113 or email [email protected].
Credit – blog post written by Lawrence Adams.