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RESTRICTIVE COVENANTS


Employers often incorporate post-termination obligations into an employee's contract of employment whereby an employee agrees not to do certain things after he or she leaves the company. These obligations are called restrictive covenants. They are designed to protect the employer's business and are particularly common in the contracts of employment of sales staff who have access to and intimate knowledge of an employer's customer base.

There are broadly four types of restrictive covenant:

non-compete covenants - which seek to prevent an ex-employee from directly competing or working for a competitor, usually within a specific geographical area, for a set period following termination;

non-solicitation/non-dealing covenants - which seek to prevent an ex-employee from entering into working relationships with former customers, by seeking or accepting orders for goods and services, for a set period following termination;

non-poaching of employees - which seek to prevent an ex-employee from recruiting former colleagues for a set period following termination;

restrictions on the use of confidential information - which seek to prohibit the use of any confidential information (usually identified by a non-exhaustive list of examples) acquired by an employee during employment.

On the one hand employers will be understandably concerned to protect their business interests. On the other hand some types of restrictive covenants seek to impose unreasonable restrictions on employees which on the face of it would seriously prevent them from operating in the industry in which they are experienced. There are clearly two sides to the argument.

The Employer's Perspective.

Employer's must bear in mind that restrictive covenants must go no further than is reasonably necessary to protect their legitimate business interests as otherwise the covenants will be unenforceable. However this fairly simple statement disguises the complex considerations involved in defining what is "reasonable" and what is a "legitimate business interest" in any given circumstance. The covenant must have, at least on the face of it, some chance of being enforced if it is going to be taken seriously by the ex-employee or his new employers.

The Employee's Perspective

Denying an individual the ability to work and make a living in an industry in which they are experienced and in which they have developed a specific set of skills is not something which would ever be done lightly by the courts. Accordingly, covenants which seek to prevent any form of competition with a former employer are rarely enforced.

Also worth bearing in mind is that if an employer terminates the employment relationship wrongfully, for example, by failing to follow contractual disciplinary procedures or by failing to give due notice under the contract, then the covenants will automatically become unenforceable, whether reasonable or not. An employer may make a payment in lieu of notice but this will not necessarily preserve the enforceability of the covenants, especially where there is no express right to make a payment in lieu of notice under the employment contract.

Where an employee leaves of their own accord the situation is different. However, the covenants still need to be reasonable to be enforceable. For example, a covenant prohibiting an employee from soliciting the business of former customers with whom they were regularly involved is more likely to be enforceable than a covenant which simply prohibits contact with any of the former employer's customers, many of which the employee may never have had contact with.

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Leeds: 0113 2431714

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York: 01904 642727


Email: mail@richardsonlaw.co.uk


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