Protecting your business with restrictive covenants

6th February 2024

Restrictive Covenants are clauses placed within an employment contract that seek to stop the individual from doing certain things after their employment has ended.

Employers, understandably, find these clauses tricky to navigate, but if used correctly, they can be an effective way of protecting important interests – such as key clients, or trade secrets.

They are also often referred to as Post-Termination Restrictions, or sometimes just Restrictions or PTRs –making an already complex area even more difficult to follow!

 

Why should you consider putting Restrictive Covenants into contracts?

A written employment contract will contain terms about what can and can’t be done during employment. In addition to written terms, an employee will also owe their employer particular unwritten but implied duties – such as the implied duty of trust and confidence. If an employee acts against the interests of an employer during employment, even in the absence of written terms the employer will, at the very least, have recourse by virtue of various implied duties.

However, once employment ends, there is very little which automatically prevents an employee from acting against the interests of the employer. There is only limited protection, by way of ultra-sensitive, trade secrets (for example, the Coca-Cola recipe would be considered a trade secret).

This means that it’s best to consider placing Restrictive Covenants in the contract of employment, to give the employer some security immediately after an employee leaves.

 

Common types of Restrictive Covenants

 There are a few common types of Restrictive Covenants:

• Non-solicitation – these restrict the enticing away of customers, contacts and clients
• Non-dealing – these restrict dealing with or contracting with customers, contacts and clients, even if they’re the ones who approach the individual
• Non–poaching – these restrict the poaching of colleagues
• Non-compete – these generally restrict competitive behaviour, for example preventing an individual from joining a competing business to do the same role, and are usually restricted to a geographical area – e.g. a particular town or city

Restrictive Covenants should always limited by duration (e.g. 3, 6 or even 12 months).

 

What can be protected?

To be enforceable, Restrictive Covenants must seek to protect a legitimate business interest, such as:

• A trading connection (a customer, a client, or a supplier);
• Confidential information or trade secrets;
• Workforce stability

There will be no legitimate interest when an employer is merely seeking to prevent the employee from competing more generally (for example, as revenge for them leaving).

 

When will they be enforceable?

To be enforceable, Restrictive Covenants must not extend any further than is reasonably necessary to protect the employer’s legitimate interest. In essence, they must be proportionate. If a Restrictive Covenant does go further than necessary, then the restriction will likely be unenforceable.

The Courts will often take the following into account when determining enforceability:

• the wording/suitability of the particular restriction in question;
• the geographical area that the restriction seeks to cover;
• the duration of the restriction; and
• whether the intended effect could have been achieved by a less onerous restriction.

As such, Restrictive Covenants need to be drafted very carefully if they are to be enforceable – they must be prepared in full consideration of the employer’s business and the actual day-to-day role of the individual in question. In a nutshell, they must be drafted widely-enough to be useful, but narrowly-enough to be enforceable.