Restrictive Covenants – Are They Enforceable?

Employers often incorporate restrictions into employees’ contracts of employments. As these restrictions only take effect once your employment has ended, these clauses are all too often forgotten about, until such times as you decide to look for a new job.

By signing up to restrictive covenants, you are agreeing not to do certain things after your employment ends. These restrictions are designed to protect your employer against you using the knowledge and information gained during your employment, for the benefit of your new employer.

Are they enforceable?

The first thing to note about restrictive covenants is that they are void as a restraint of trade. Any attempt by your employer to deny you the right to make a living in your chosen industry or profession is taken very seriously by the court. If, for example, your contract of employment imposes a blanket ban on you working for a direct competitor of your employer, even for a short period of time, this is unlikely to be enforced by the court.

It is therefore important that restrictive covenants are carefully drafted. In the event that you challenge the enforceability of your restrictive covenants in court, it would be for your employer to convince the court that the restrictions were sufficiently narrow so as to be properly enforced.

The extent of the restriction should also be relative to your position within your employer’s business. For example, if you are a senior employee who has access to sensitive information, it may well be justified for you to be subject to more onerous restrictions, as opposed to you being a junior employee with no access to sensitive information. In general, if your employer relies on a one-size fits-all policy when drafting restrictive covenants, it risks them being unenforceable.

Certain restrictive covenants will be enforceable, if your employer can convince the court that they are :-

reasonable
necessary to protect its legitimate business interests; and
of a duration no longer than is necessary to protect those interest

What is reasonable?

What is reasonable depends on the nature of your employer’s business. However, by way of example, a restrictive covenant preventing you from soliciting the business of your employers, or clients with whom you were regularly involved is more likely to be enforceable than a covenant which simply prohibits contact with any of your employer’s customers or clients, many of which you may never have had contact with.

Similarly, a restrictive covenant preventing you from working in the same industry within 10 miles of your employer’s premises is more likely to be enforceable than a covenant which simply prohibits you from working in the same industry within the UK, particularly if your employer does not have a presence throughout the UK.

What is a legitimate business interest?

This is not intended to be an exhaustive list and a lot will depend upon the nature of your employer’s business. However, restricting you from working in an industry where you could damage your employer’s business by using information such as trade secrets, client database, details of pricing structures, tendering strategies etc (essentially any information that could cause serious damage to your employer’s business if you used it to provide an advantage to your new employer) may well be legitimate, provided it is reasonable and of a duration no longer than is necessary to protect those interests.

Again, it depends on the nature of your employer’s business. However, it may be legitimate to restrict you from working for a competitor for a period of 6 months anywhere within the UK if you are a national sales director and your employer has a presence throughout the UK. However, it would not be legitimate for the same restriction to be applied to you if you are a junior sales assistant who only operates within, say, the Manchester area.

What is a reasonable duration?

It is rare that the court will enforce a restrictive covenant of more than 12 months’ duration, unless there are exceptional circumstances. It would be for your employer to show that the circumstances were exceptional; it would not be for you to show that they were not.

Typically, the court would only enforce restrictive covenants of no more than 6 months, provided of course that the restrictive covenant was reasonable and necessary to protect a legitimate business interest.

Other Considerations

Breach of Contract

Even if your employer ticks all the boxes that suggests a restrictive covenant is enforceable, there is another situation that could render it unenforceable. If your employer terminates your employment in a wrongful manner (eg by failing to give you the correct notice under your contract), then this is technically in breach of contract. If your employer is in breach of contract, this means that any restrictive covenants contained within it are automatically void, even if they would otherwise be enforceable.

One common breach by employers is making a payment in lieu of notice (ie paying you for your notice period without you having to work it) in the absence of an express contractual right to do so. In these circumstances, it is unlikely that your restrictive covenants would be enforceable, even if they would otherwise have been so. Bear in mind that this is not the case if you resign, rather than being dismissed by your employer. If you resign, you will remain bound by your restrictive covenants, unless of course you can establish that they are unenforceable.

Deterrent Factor

Quite often restrictive covenants are inserted into contracts of employment, purely as a deterrent. Employers are often aware that they are unenforceable but rely on the fact that at the time you are required to sign up to them, you are embarking on a new career with your employer and are unlikely to anticipate a dispute arising in the future. After all, it is unlikely that you will have given any thought at all to the potential termination of your employment, when you sign your contract of employment.

Common Restrictive Covenants

Restrictive covenants can take many forms but the most common restrictions are :-

Non-Compete

This type of restriction prevents you from directly competing or working for a competitor of your employer, usually within a specific area (eg 10 miles of your employer’s premises) and/or for a specific period of time (eg 6 months from termination).

Non-dealing

This type of restriction prevents you from working for your employer’s customers, clients, suppliers for a specific period of time (eg 6 months from termination).

Non-poaching

This type of restriction prevents you from enticing your employer’s staff away from the business, again usually for a specific period of time (eg 6 months from termination).

Confidential Information

Even if there is no specific restrictive covenant that deals with confidential information, you are under an implied duty not to use confidential information following the termination of your employment, whether by reason of resignation or dismissal. Confidential information, is usually defined in your contract of employment but typically includes things such as client information, customer accounts, price lists, quotes for tenders etc.

What your employer cannot do is prevent you from using your "skill and knowledge", even if you acquired that skill and knowledge whilst working for your employer. This means that, for example, if you were employed as a joiner who had learnt a new method of, say, joining two pieces of wood together, then this would become part of your skill and knowledge and you would be free to make use of this knowledge and information, even for a competitor.

It is understandable that your employer will want to protect their business interests. However, some employers seek to impose unreasonable and more importantly unenforceable restrictive covenants, which would effectively prevent you from working in the industry in which you have gained your experience. There is clearly a balance to be struck between seeking to protect a legitimate business interest and preventing you from seeking alternative employment, even with a direct competitor.

Remedies

If your former employer has reason to believe that you have breached your restrictive covenants, the most common remedy sought is an injunction. An application will generally be made for an interlocutory injunction pending a full trial, ie the court will be asked to immediately put a stop to what you are doing and hear the full evidence at a later date.

Whether or not an interlocutory injunction will be granted, will depend upon whether the court is satisfied that there is a serious question to be tried. That is, that the claim is not frivolous or vexatious and the so-called “balance of convenience” lies in favour of granting or refusing the interlocutory injunction. The court will consider :-

whether damages would be a sufficient remedy at trial – this will not be the case where damages are unquantifiable, and/or where you are unlikely to have the means to pay them;
whether more harm will be done by granting or refusing an interim injunction;
where factors are evenly balanced, the court will favour preserving the status quo;
any delay in making the application or acquiescence on the part of the employer; and
the conduct and dealings of the parties.

If your employer claims damages for breach of a restrictive covenant in an employment contract, it will need to show some loss resulting from the breach. This will normally be loss of profits on contracts or opportunities diverted by you. Often it is hard to prove that such contracts or opportunities would have definitely been secured by your employer, had it not been for your breach. In such instances, the court is likely to evaluate damages based on the chance your employer has been deprived of. Assessing damages is not easy. However, the court is unlikely to use this fact to exonerate you from paying damages for your breach.

Summary

Whilst it is undoubtedly the case that restrictive covenants can protect an employer’s legitimate business interest, the mere fact that you have restrictive covenants in your contract of employment is by no means an indication that they are enforceable.

Whether your restrictive covenants are enforceable or not (which will ultimately be a matter for the court to decide) they should have, on the face of it, some chance of being enforced if your employer expects them to be taken seriously by you and ultimately the court.

It can prove expensive to defend an application by your employer and you should take your restrictive covenants seriously, particularly if you believe you have, or are likely to breach them.

28 MAY 2009

For Further information on Linder Myers expertise in dealing with the issues raised in this article please contact:

JOANNE WHITE, SOLICITOR
EMPLOYMENT DEPT
0161 837 6832
joanne.white@lindermyers.co.uk