Restrictive_Covenants_0208 by docsshare


									                 Restrictive Covenants in Employment Contracts

This guide to the legal aspects of restrictive covenants has been prepared by the
Company/Commercial Department of Clark Holt, Commercial Solicitors. Any
references to law or practice in this note are applicable as at February 2008.

1.     Introduction

       On the departure of a key employee, the employer will be concerned not only
       by the immediate effect on the company but also by the possibility of the
       departing employee going to work for a competitor or setting up in
       competition, perhaps using skills, information and contacts acquired during
       employment. The aim will always be to prevent this happening if at all
       possible and, if not, to buy time in which to minimise the damage caused by
       the departure. The employer may be able to rely on “garden leave” or
       “special projects” terms in the employment contract to keep the employee out
       of action for a period. Alternatively, there may be grounds on which to
       enforce a duty of confidentiality. This note, however, concentrates on the use
       of post termination restrictive covenants to restrict an employee’s activities for
       a limited period following the departure.

2.     Background

       The starting point is that all covenants in restraint of trade (i.e. which prevent
       or restrict a person from plying a trade or otherwise earning a living) are
       unenforceable as a matter of public policy. But employers may, as an
       exception to this general rule, protect their legitimate business interests to the
       extent that it is reasonable to do so. Restrictive covenants in employment
       contracts must, therefore, always be drafted very carefully to ensure that the
       protection they afford is reasonable in all of the circumstances. Even slightly
       overstepping the mark will render the provision void in its entirety; the Court
       will not, for example, reduce to six months a restriction which lasts for twelve
       months if it is held to be unreasonably long. It follows, therefore, that this
       area deserves great attention when the employment contract is drawn up, and
       also that the position should be kept under review as the employee’s role, and
       also the business of the company, develops.

3.     Types of Restrictive Covenant

      There are four main categories of covenant, namely those preventing the
      employee from:-

       3.1    competing with the employer within a defined area (traditionally
              geographic but increasingly defined by reference to the employer’s

     3.2    contracting with the employer’s suppliers and customers;

     3.3    approaching the employer’s suppliers or customers; and

     3.4    inviting other members of the employer’s staff to join any new venture
            with which he is involved.

     NB. The expression “poaching” is often used in relation to both 3.3. and 3.4.

4.   Factors Affecting Reasonableness

     The employer is able to protect any right that the Courts will regard as capable
     of legitimate protection. This includes trade secrets and goodwill as well as
     the stability of the workforce and more diffuse concepts such as an interest in
     maximising profits. The restrictive covenant must go no further than is
     necessary to protect the employer’s legitimate interest.

     The factors taken into account in assessing reasonableness include:

     4.1    The seniority of the employee concerned. The more senior the
            employee is, the more onerous a restrictive covenant may be.

     4.2    The role of the employee. Is there a connection between the business
            of the ex-employer and the new employer?

     4.3    The nature of business of the employer. For example, it may well be
            reasonable for a geographic restraint to be worldwide if the company’s
            market place is global (as is the case with many software companies).

     4.4    The length of the covenant. The effect of the covenant will be to
            prevent the employee from earning a living for a limited period. How
            long is it reasonable to prevent the employee from earning money?

     4.5    The length of the employee’s notice period. Although a recent case
            has said that the fact that an employee has served six months on a
            notice period (perhaps on garden leave) is irrelevant to the
            enforceability of a post termination covenant, the reality is that a court
            asked to enforce a restrictive covenant in such circumstances will take
            into account the total length of time over which the employee’s
            knowledge may grow stale.

     4.6    Other factors are the personality of the employee, the frequency of
            dealings with customers and whether the employee brought customers
            to the employer when joining the company.

5.     Enforcement

       Litigation is expensive and time consuming and should only be considered as
       a last resort. The priority should be to draft restrictive covenants which appear
       to be reasonable so that an employee (and the employee’s solicitor) will see
       little point in contesting the effect of the covenants. On this basis, less is more
       and when setting the parameters of the covenants, it is far better to err on the
       side of caution. A covenant that prevents an employee from competing for a
       period of three months is much more valuable than a six or twelve month
       covenant which the employee believes to be questionable. In addition, the
       three month period may in fact be more than adequate for the employer to
       carry out a damage limitation exercise, by contacting and/or visiting customers
       and suppliers to maintain goodwill and continued business, particularly if the
       departing employee can be placed on garden leave or special projects for a

6.     Policy

       The post termination provisions of an employment agreement merit close
       attention when the employment starts. Clark Holt have a checklist of
       questions to be addressed when drafting a contract of employment and
       carrying out this exercise will, if the matter ever comes to court, provide
       valuable evidence that serious thought was given to producing reasonable
       covenants at the time rather than simply using whatever was in the last
       employee’s contract.

       The law in this area is, however, constantly changing and, as indicated above,
       the circumstances of the employment will also change with time. The best
       practice is to carry out an annual review and consider whether the covenants in
       the employee’s contract are still appropriate. If not, they should be varied
       with the agreement of the employee concerned. As in many other areas,
       prevention is better than cure and management strategy should also be to
       motivate and reward the workforce in order to minimise unscheduled

Clark Holt, Commercial Solicitors, deal exclusively with Commercial Law. They have
produced other related publications, copies of which are available free upon request.

For further information contact Jeremy Holt or Martin Bazen at:

Clark Holt                                  Tel:      01793 617444
Commercial Solicitors                       Fax:      01793 617436
Hardwick House
Prospect Place
Swindon                                     E-mail:
SN1 3LJ                           


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