Restrictive Covenants – Tips To Protect Your Business

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The Law Of…Keeping Your Business Safe 

Restrictive covenants are a useful way for employers or companies to protect their business after an employee’s contract has terminated.  

David Hession, Solicitor in Employment Law, explains why having reasonable restrictive covenants in place is key to safeguarding your business.

 

When Are Restrictive Covenants Used? 

Typically, a restrictive covenant will operate where a number of post-termination clauses are inserted into an employee’s contract of employment. 

These clauses will prohibit your employee from contacting, soliciting or poaching former customers, employees or suppliers. They usually last for a period of 6 months after an employee's employment ends, although this can vary depending on the industry your business operates in. 

In some cases, an employee’s restrictive covenants may extend to a non-compete clause. This clause will seek to prevent them from working for a competitor organisation for a certain period after the end of their employment. 

Restrictive Covenants In Practice

In the case of Egon Zehnder Limited v Mary Caroline Tillman, the High Court considered whether a non-compete clause was reasonable. 

It is worth mentioning that the courts will take a number of factors into account when deciding on whether a particular clause is reasonable. Most notably, the restrictive covenant must genuinely protect the interests of the business. The wording of the clause must therefore not go any further than is necessary in order to protect a company. 

In the Tillman case, the High Court found that the non-compete clause was reasonable. The employer was therefore successful in its application to obtain an injunction, and this had the effect of preventing Ms Tillman from working for a competitor organisation. 

One of the factors the courts looked at was whether the non-compete clause was reasonable based on Ms Tillman’s role at the point at which the restrictive covenant was entered into. 

The High Court was satisfied that in entering into the contract, the company was aware that Ms Tillman had a particular skillset and level of experience that made the covenant necessary. In other words, had the non-compete clause not been in place, this could have represented a risk for the employer once the employment contract had ended.

What Can Employers Learn From This Case?

This case re-enforces the point that the reasonableness of restrictive covenants are assessed at the point at which they are entered into. If there has been a change in circumstances (such as a promotion) after the restrictive covenant has been entered into, an employer is unlikely to be able to rely on this point. 

It is common for employers to want to take action where a former employee is acting in a way that could damage their business. For example, this could include soliciting former customers. 

In such circumstances, you may want to sue for damages or seek an injunction. In order for you to take such action, the restrictive covenants and the wording contained within them must be seen as reasonable. 

David comments: 

"Employers are reminded to take care when drafting restrictive covenants to ensure that they do not go any further than is necessary to protect the needs of their business." 

"With this in mind, employers should seek advice from an employment solicitor or qualified legal professional if they are considering putting restrictive covenants in place."



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