Restrictive covenants – an employee’s perspective
Post-termination restrictive covenants are a common feature of employment contracts, particularly for senior personnel, but often they are accepted without considering whether they are actually enforceable and how they would affect an employee’s future prospects when they decide to leave their job.
If you leave, and your ex-employer claims that you are bound by a restrictive covenant that limits your activities, disputes can arise. Often the first you will find out about this is when you receive an aggressive letter from your ex-employer’s solicitors claiming that they are entitled to all kinds of legal remedies to restrain you, including an injunction and damages. What should you do?
In this situation, prompt legal advice is essential, as Hannah Kennedy, dispute resolution specialist Solicitor with Myers & Co in Stoke-on-Trent, explains:
‘If you start working for your ex-employer’s biggest rival, or you leave taking commercially sensitive information with you, the next thing you might get is a Solicitor’s letter. You need to speak to a lawyer quickly to find out whether there is anything you can do.’
Restrictive covenants can offer a degree of protection, but only if they satisfy the strict legal criteria needed to make them enforceable. Restrictions that are wider than necessary or which seek to exclude you from an industry or profession, even for a short time, may be susceptible to challenge.
Criteria for enforceability
To be enforceable, a restrictive covenant must be:
- necessary to protect a legitimate business interest;
- no wider than necessary to achieve that objective (including its geographical extent); and
- no longer in duration than is needed-which in most cases means a maximum of 12 months and in many instances significantly less than this.
Whether the qualifying criteria are met will be judged at the time the restriction was agreed, as opposed to the time at which the dispute arises.
A restrictive covenant must also have been formally incorporated into your contract of employment and not subsequently rendered void, for example as a result of a breach of contract occasioned by your wrongful dismissal.
Options where a dispute arises
We can advise you whether a restrictive covenant is likely to be enforceable, and what your employer is likely to do. We can also advise you on any enforcement action that might follow. This will include consideration about whether any action might also be brought against your new employer. This might be the case if the new employer capitalises on your confidential information such as pricing strategies to secure contracts that would have otherwise been awarded to your ex-employer.
If you raise questions about the enforceability of a restriction, your employer has three options:
- accept that the restriction is not enforceable and take no action;
- maintain that the restriction is enforceable and insist on full compliance; or
- acknowledge that there may be a question mark over enforceability and attempt to reach a compromise to ensure a certain and satisfactory outcome, usually via agreed adjustments to the restriction to make it more acceptable.
Pausing for thought
In nearly every case where enforcement action is contemplated, it is normally sensible to try to find a mutually agreeable solution before escalating matters to court. This might be possible through direct negotiation or by the use of an independent mediator.
An amicable solution might be possible where the dispute is based on the scope or duration of a restriction. For example, a wide-ranging restriction against you preventing the poaching of other staff for 12 months following your departure might be scaled back to only apply to team members of a certain seniority, or with whom you had a personal working relationship, and the time limit could be reduced to between three and six months.
Similarly, a non-compete restriction aimed at preventing you from working for a competitor anywhere in the UK for a period of 12 months following your departure, might be scaled back to only cover competitors based within a certain distance from one of your ex-employer’s premises and be limited to ten months.
An amicable solution may also be possible in cases where the you are on uncertain ground, for instance if you have claimed wrongful dismissal without this having first been determined by an employment tribunal.
When court action may be brought
Court proceedings are usually only considered as a last resort, where attempts to reach an amicable solution have failed or the ex-employer claims that the severity of the damage that may be caused to its business is so great that an injunction is needed to bring an immediate halt to your activities and/or those of a new employer.
To bring court proceedings, the ex-employer will need to issue a claim to determine enforceability and claiming an injunction and damages-that is, an order directing you to comply with the contractual restriction and to pay your ex-employer compensation for any losses incurred. The ex-employer will also make a claim for the costs of the proceedings.
To support the claim your ex-employer will need to gather evidence to prove that:
- the covenant was necessary;
- it was reasonable in scope and duration;
- you agreed to be bound by it;
- the terms of the restriction have been breached;
- its business has suffered loss as a result; and
- it will continue to suffer if the non-compliance continues.
Where an injunction is being considered your ex-employer will need to be able to satisfy the Court that there is sufficient evidence to persuade it that such an order is necessary, primarily by showing that:
- the harm its business is suffering cannot be compensated adequately by an award of money alone; and
- the damage that will be caused to its business if an injunction is not granted will be worse than the damage caused to you if an injunction is granted when it ought not to have been.
Deciding how to respond to a letter before action or Court proceedings for an injunction requires careful consideration, particularly as it could be you who ends up having to pay compensation if the wrong call is made.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.