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Restrictive Covenants

What are restrictive covenants?

A written agreement between and employer and an employee that restricts specified business activities after the employee’s employment has terminated for a defined period of time. The restrictions usually relate to poaching or dealing with customers or potential customers, poaching staff or competing within a defined area or industry. Restrictions are normally contained in an employee’s contract of employment or a separate document created for that purpose.

Are restrictive covenants compulsory?

No. It is a matter for agreement between the employer and employee and may not be appropriate if an employee has no influence over customers and employees, or access to commercially sensitive information. An employer should be wary of offering employment and allowing access to its customers and commercially sensitive information without protecting itself at the outset. Alternatively, a potential employee with a following may wish to exclude certain customers from covenants so that they do not ‘belong’ to the new employer. If an employer requires an existing employee to agree to new or different covenants then this should be dealt with as a negotiated variation to the contract of employment.

Are restrictive covenants enforceable?

Yes. The starting point is that restrictions are generally unenforceable as anti-competitive, but can be relied on by an employer provided they are reasonable in scope and genuinely necessary to protect an employer’s existing goodwill in its customers and employees, or its confidential information (known as ‘protectable interests’). The intention is to protect the employer from unfair competition.

When are restrictive covenants reasonable?

This depends on individual circumstances, as well as the scope and duration of the restriction itself. Relevant factors can include an employee’s seniority, the nature of the risk to the employer, the time an employer needs to rebuild its customer connections after an employee leaves and whether an employee had contact with all of the customers the restriction applies to. Generally speaking a restriction confined to soliciting and dealing with customers is more likely to be enforced than a prohibition against competing activity or a geographical restraint, and restrictions of more than 12 months are unlikely to be enforced in the absence of special circumstances, such as the sale of a business where a purchaser is buying the goodwill from the vendor.

How are restrictive covenants enforced?

A departing employee should be reminded of the restrictions in writing on departure and wherever possible these should be brought to the attention of the new employer. If the former employer identifies a breach, or a substantial risk of breach, then the employee can be asked to confirm in writing that they will abide by the restrictions and that the new employer will not induce a breach by the employee. If this is not forthcoming and/or the conduct complained of continues, then the former employer can apply to Court for an interim injunction restraining that activity and/or damages for breach. If an injunction is granted then the former employer will usually be asked to give an undertaking to pay any damages suffered by the opponents if unsuccessful at trial. Most proceedings are resolved at an interim stage by agreement, but if the dispute continues then a Court will decide the issue at trials and order a final injunction and/or damages and costs as appropriate.

What other protection can be given?

A Court may also be asked at the same time to grant an injunction restraining the misuse of confidential information. In exceptional circumstances a Court can also grant an order to enter premises under independent supervision to identify and recover misappropriated property or to preserve evidence.

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