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Restrictive covenants: what are they?

Restrictive covenants: what are they?

14th February 2008

Email: businessreporter@newburybusinesstoday.co.uk

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Employees are one of the most important assets of a business. However, once they leave your employment it is important your business is protected and they do as little damage as possible. Andrew Egan, specialist in employment law with Charles Lucas & Mars

IT IS common practice for employers to include in employment contracts clauses restricting an employee’s behaviour once the employee has left the business. These clauses are known as restrictive covenants and are usually found in an employee’s contract of employment. 
What the employer is trying to protect is their  legitimate business interests, including any information the employee may have with regard to the employer’s client or customer database, or information relating to trade secrets or other confidential information.
Broadly speaking, there are four types of restrictive covenant that commonly appear in a contract of employment:
Non-competition covenants prevent an ex-employee from working directly for one of the employer’s competitors or working for themselves in competition with their former employer. Such a clause will restrict who an ex-employee can work for within a specific geographical location (often a radius of x miles from the businesses premises) for a fixed period.
A non-solicitation clause prevents an ex-employee from entering into a working relationship with a former employer’s customers or clients.  A 'non-dealing' clause is also often included. Not only is an ex-employee prohibited from soliciting customers, they are prevented from accepting work from the former employer’s clients – even when it is the customers who might make the initial contact. 
A non-poaching clause prevents an ex-employee from recruiting other work colleagues from leaving to join them.
A restriction on the use of confidential information looks to prohibit an ex-employee from using confidential information/knowledge or trade secrets which they gained while working for their former employer.  This information can be anything ranging from their current marketing strategy to salary details for their employees. 
In order for such covenants or provisions in a contract to be enforceable, the employer must ensure the clauses in the contract only go so far as to restrict an employee as are reasonably necessary in the circumstances.  If a clause is too restrictive it will be not be enforceable against an ex-employee and struck out by the courts, as an employee has a right to earn a living.
The employer must show that it was reasonably necessary to include such clauses with specific restrictions in order to protect a legitimate business interest.  Employers must bear in mind that they cannot impose unfair restrictions with regards to geographical location and length of time, as an unfair restriction will be scrutinised and struck out by the courts. 
For example, a covenant which prevents an employee from working for a competitor for a period of 12 months anywhere in the UK may be enforceable against a national sales director, but would not be appropriate for say a hairdresser who only deals with people in the local community.
Restrictive covenants should be supported by suitable clauses dealing with the protection of intellectual property and maintaining confidentiality, so that a former employee does not or is at least discouraged from passing over vital information to a key competitor
For employees, often these sorts of clauses will go unnoticed until it is too late to do anything to change them. It is worth employees considering whether the obligations placed on them are fair or whether it is possible to re-negotiate such restrictive covenants so they are more favourable.
Employers should check their staff contracts and the service agreements of managers and directors and review these from time to time as the activities of the business change. They should also contact their legal advisers to ensure that they have such clauses properly drafted and included in these contracts and agreements.  
For further information contact Andrew Egan on (01635) 521212 or andrew.egan@clmsolicitors.co.uk