If reasonable and drafted precisely, restrictive covenants (sometimes known as post termination restrictions) can be used to protect your business interests and limit damage caused by employees leaving and joining a competitor, setting up a competing business, poaching key employees or using your confidential information or business contacts.
There are different types of restriction which might be helpful in a variety of circumstances both during employment and when an employee leaves. Our employment law solicitors can help with specific advice, but below is some general information about restrictive covenants in employment law
Jump to:
- Why include restrictive covenants in an employment contract?
- What are the different types of restrictive covenant in employment law?
- Other than employees, who else can restrictive covenants apply to?
- Are restrictive covenants in employment contracts legally binding?
- How enforceable are restrictive covenants in employment contracts?
- What if a former employee breaches a restrictive covenant?
- What duties and obligations do employees have towards your business, after they leave employment?
- What can you do if employees breach their contractual obligations?
- Do restrictive covenants apply on a TUPE transfer?
- Restrictive covenants in the case of redundancy and other dismissals
- PILONs and restrictive covenants
- Is the situation different when an employee resigns?
- Summary
Why include restrictive covenants in an employment contract?
During the employment relationship there are some terms that are implied into the employment contract when they are so obvious that they don’t need to be written down (such as the duty to act in good faith). Whilst these implied terms provide some level of protection during employment, they aren’t enforceable after an employee leaves.
As a general rule, explicit contractual terms that restrict employee activities after termination are void and unenforceable unless you can demonstrate they:
- are designed to protect your legitimate business interests; and
- extend no further than is reasonably necessary to protect those interests
By including a restrictive covenant clause in an employee’s contract of employment, it makes it clear to the employee what activities are restricted, how long the restrictions last and in what circumstances they apply. If the restrictive covenant clause is reasonable and drafted precisely, this can help protect your commercial interests from being exploited following an employee’s departure.. The clause could prevent an employee from using confidential information, including strategic plans, business contacts or other sensitive information in a damaging way after they leave your business.
Restrictive covenants can also prevent employees from joining a competing business for a certain period of time after they leave and discourage your competitors from attempting to recruit your employees, as courts can enforce restrictive covenants against the new employer and the former employee in some circumstances.
Getting restrictive covenants right could make a huge difference to the future profitability and security of your business. Our employment solicitors recommend that you seek professional advice when initially drafting and updating your contracts of employment.
What are the different types of restrictive covenant in employment law?
The main types of restrictive covenants are:
- Non-solicitation– these seek to prevent a former employee from actively contacting your customers or clients. An example might be a former employee making an initial approach to try and persuade a customer of yours to transfer their business to them. However, the employee does not always have to make contact first, it depends on the facts.
If an employee has a significant personal influence over a customer and has had recent dealings with them, a non-solicitation clause for a reasonable time relating to those customers may be appropriate and would likely be enforceable. Recent dealings usually relate to the past 12 months. However, this also depends on the employee’s seniority, role, loyalty of clients in the market, time it might take for a future employee of the business to gain the same influence over that customer and what competitors’ non-solicitation clauses say.
You can also protect your general customer base and goodwill if an employee knows of a confidential customer (provided the restriction is limited to the time that customer will likely remain secret and the time there would be goodwill attached to that individual).
It is possible, although more difficult, to enforce a non-solicitation restriction relating to potential customers if they can be clearly defined. There would, however, need to be proof that in the role and industry, winning work from a customer was a lengthy, difficult and an expensive process. A potential customer would need to have had previous ‘dealings’ with you, even if these had not led to any actual business by the time of the employee’s departure. For instance, providing samples of a product but not receiving an order is insufficient to amount to ‘dealings’ with a potential customer. - Non-poaching and non-employment covenants –these prevent a former employee from poaching or employing members of your staff when they leave to protect the stability of your workforce. Both types of restrictive covenant are potentially enforceable if carefully drafted and reasonable.
Non-poaching covenants prevent employees from approaching former colleagues with a view to persuading them to join a new business and are generally easier to enforce than non-employment covenants, which prevent an employee from recruiting your staff for a new business.
Generally, these covenants should be limited to restricting the poaching or employment of senior staff with whom the employee had a meaningful connection with, but if you are a small business with very few key employees, it may be reasonable for you to restrict a former employee from poaching or employing any staff members. The period over which an employee will have influence over their former colleagues will be limited, and so the restriction can only last for that same period to be deemed reasonable. - Non-dealing covenants – these restrict a former employee from doing business with your customers, regardless of which party approached the other and avoids having to show that the employee took active steps. These covenants are more difficult to enforce than a non-solicitation covenant, as potentially the customer’s choice is being taken away and they are also being restricted, as well as the former employee.
Enforceability is more likely if you can demonstrate that the departing employee’s close connection with customers could lead to a significant loss of business. - Non-compete covenants – these are considered the most onerous type of restriction as they seek to prevent an employee from joining a competitor or setting up their own business in competition shortly after leaving your business. Non-compete covenants tend to be more difficult than the other types of covenant to enforce.
If there is a specific form of confidential information (such as a manufacturing process) which cannot be protected by confidentiality provisions and other covenants in an employee’s contract and an employee is bound to use that information if they joined a competitor, this type of clause is more likely to be enforceable. Similarly, if an employee’s relationship with customers is so strong that the only effective protection is if the employee does not work for any competitor, for a certain period, the covenant is more likely to be enforceable.
Non-compete covenants can be enforced if they are sufficiently precise, reasonable and justifiable so the importance of getting the correct wording incorporated in the employee’s contract is critical. Also, it would usually be advisable for there to be a carve-out of this type of clause for holding minor shareholdings (typically up to 5 per cent) held by the employee in a competing business, so that the clause is not considered unreasonably wide. Our experienced employment lawyers can help with this.
Other than employees, who else can restrictive covenants apply to?
| Employment relationship | Can restrictive covenants be applied? |
| Casual workers | It would not normally be appropriate to impose conventional post-termination restrictive covenants on a casual worker (for example in a zero hours contract). There is usually no continuity of employment and no mutuality of obligation, so workers can work for others even during their contract in such arrangements. And since December 2022 a ban on exclusivity terms for low earning workers means that non-compete clauses can no longer be enforced. The other potential issue is that attempting to include restrictive covenants in a worker’s contract can lead to confusion about the employment status of the worker. Imposing numerous restrictions on an individual suggests a level of control over the activities of the worker that is more akin to an employment relationship than that of an employer and casual worker. It is also likely to be unreasonable to restrict a casual worker, as they tend to be more junior with fewer responsibilities or influence over business contacts, and so no legitimate business interest is being protected by restricting these individuals. |
| Partners and LLP members | Restrictive Covenants are often found in a Partnership or LLP Agreement but are treated differently from restrictive covenants against employees. Partners and LLP members can be validly bound by covenants which are much more onerous because the courts consider that there is a greater equality of bargaining power between Partners or LLP members who are all subject to the same restrictions in a partnership or LLP agreement than as between an employer and employee. As well as the restrictive covenants you might see in an employment contract, a partnership agreement can impose restrictions to prevent team moves. These are known commonly as ‘waiting room’ clauses and limit the number of partners who can leave within a certain space of time. Once the limit has been reached in that calendar year, any further partners wishing to leave have to wait their turn. .Non-compete covenants which prevent a partner from working for a competitor within a defined geographical area are generally upheld if the geographical extent of the covenant is held to be reasonable, even if the period of restriction is significant. |
| Consultants | A consultant may build up close relationships with your customers, suppliers and employees. They may also acquire valuable confidential information which they could use to their advantage when working with other businesses. While it is rare to impose a non-compete covenant on a consultant (as it might suggest an employer/employee relationship), other types of restrictive covenants such as non-solicitation are common and advisable. Provided that the usual rules relating to restrictive covenants are met, restrictive covenants could be binding against self-employed consultants, but there is less case law on this. If a service company is used as an intermediary in such an arrangement, the restrictive covenants will only bind the service company unless the consultant is also a party to the agreement or enters into the restrictions separately using another document. |
Are restrictive covenants in employment contracts legally binding?
Restrictive covenants can be legally binding if they are not drafted to widely and you can demonstrate that they are justified and go no further than is necessary to protect your business interests.
Restrictive covenants in an employment context have stricter rules and are less likely to be enforceable than, for example, restrictive covenants that apply following the sale of a business or in other commercial agreements, where the parties’ bargaining powers are more equal. A general guide in a wider commercial context can be found here Restrictive Covenants in Business Agreements.
While non-compete covenants can potentially be enforceable, they must be carefully considered and drafted. A restrictive covenant only designed to restrict competition in itself will not be enforceable. The covenant must also be necessary to protect your commercial interests such as confidential information, trade secrets or contacts and to prevent a former employee using these for their own, or a competitor’s, unfair advantage against you. Restrictive covenants must be no wider than necessary to protect legitimate business interests otherwise, they risk being unenforceable .
As restrictive covenants are assessed against the interests of the parties at the time they were entered into, it is advisable to review and update restrictive covenants whenever an employee is promoted or their role changes substantially. Our employment solicitors can advise you further on this.
How enforceable are restrictive covenants in employment contracts?
To give a restrictive covenant the best chance of enforceability, the restriction should only include the interest that needs to be protected, should be limited to a reasonable period of time post-termination and where appropriate, to the specific geographical area where the employee carried out activities for you. The size, nature and density of the population of the geographical area are relevant too. If your business operates globally, worldwide restrictions are sometimes possible if you can demonstrate that this is required and justifiable to protect a legitimate business interest.
Any restrictive covenants need to be properly incorporated into an employee’s employment contract (or in a settlement or other agreement with additional consideration provided as may be necessary). Enforcing restrictive covenants in the courts can be an expensive and time-consuming process and so to maximise the chance of them being enforceable you will want to ensure they are clearly drafted and reasonable when the parties entered into them.
If a restrictive covenant is not enforceable because it’s too wide or unreasonable, the Court can remove or ‘sever’ the unreasonable part, leaving the rest of the covenant intact and enforceable. However, a court will not re-write a covenant. Severance is only possible if the unreasonable element can be deleted without changing the remaining wording and if, by doing so, it does not materially change the overall effect of the original restrictions.
Courts will rarely enforce restrictive covenants where poor drafting has led to a vague restrictive covenant or one which doesn’t match the type clearly agreed between the parties when the contract was formed. This discretion is severely limited, so getting the correct legal advice from the outset is valuable. If you would like assistance with this, our employment law solicitors can help.
What if a former employee breaches a restrictive covenant?
The options available when seeking to enforce restrictive covenants include the following:-
| Enforcement option | Details |
| Apply for an interim injunction | An interim injunction is an injunction that you ask the court to order pending the final outcome of your claim for a permanent injunction or damages. Essentially, it preserves the status quo and prevents any further loss whilst the court decides the full claim. If there is a serious issue to be tried, if damages (monetary compensation) would not be a sufficient remedy and if on the ‘balance of convenience’ the employee would not be any worse off by granting the injunction (for example if they haven’t started working for a competitor yet), then an interim injunction may be granted. Damages are unlikely to be a sufficient remedy if there is a risk that additional (and perhaps unquantifiable) losses will be caused if the breach continues or if the former employee would not be able to afford to pay the damages. |
| Seek damages from the employee | Where financial compensation is considered to be sufficient, an injunction would not be granted. The court would decide: whether the restrictive covenant is enforceablehas it been breached by the employeewhether the employee’s breach has caused the employer financial losshow the loss should be assessed Claims for ‘General Damages’ would be for actual financial loss the business has suffered as a result of the breach. For example if your former employee took a customer contract to their new employer you could claim the loss of profit that resulted. An account of profits is possible in breach of restrictive covenants cases but is usually only available where there has been a breach of fiduciary duties or a breach of the duty of confidentiality. It is possible, in exceptional circumstances, to claim ‘negotiating damages’ (also named Wrotham Park damages) if an employer cannot prove actual loss, by claiming a sum equivalent to what the employee would have paid the employer, before breaching the post termination restriction, to release the employee from its obligations. |
| Undertakings | The former employee can be asked to give an undertaking that they will observe their contractual restrictions. This avoids the need for a contested hearing on an interim court application and secures short-term protection from breach of covenant without incurring the costs of going to court. In many cases the matter settles before the trial. An undertaking can be agreed through solicitors in writing or to the court: the former will only have contractual effect, whereas the latter will result in a court order and any breach could be amount to contempt of court. |
| Declaration | The court can, but rarely does, make a binding declaration in respect of post-termination restrictions. Even more infrequently, an employee can apply for a declaration that their post-termination restrictions are unreasonable or otherwise unenforceable. |
| Act against a third party | A claim can be made against a third party who has benefited from the former employee’s breach of a restrictive covenant. This might be a) the employee’s new if they have induced or conspired in the breach of restrictive covenants; b) a recipient of your confidential information; and/or c) any funders or associates of the former employee’s new business (where the former employee has set up their own business). This can be a better option, as a new employer is likely to have deeper pockets than the former employee and it puts further pressure on the employee not to continue a breach. A claim for inducing a breach of contract can be brought against the new employer, if you can prove that the new employer knowingly and intentionally induced the breach without reasonable justification, and that as a result your business has suffered financial loss. |
What duties and obligations do employees have towards your business, after they leave employment?
Aside from obligations stated in an employee’s contract as continuing after the end of their employment, most implied terms end on termination apart from those outlined below:
- Fiduciary duties - directors have fiduciary duties and by law must act in their employer’s best interests. Senior employees may also owe duties of fidelity (to act honestly and in good faith) without being a statutory director, obliging them to, amongst other things, report their own wrongdoing and that of other employees, including having knowledge of a team or an individual moving to a competitor. Where an employee is less senior and does not owe fiduciary duties, it is unlikely that these duties would apply.
- Confidential information - aside from any written confidentiality clauses in an employee’s contract or settlement agreement, there is an implied term that whilst employed, an employee must not disclose to third parties any confidential information or trade secrets obtained during and as a result of their employment with an employer. Neither must they use that confidential information for their own benefit. However, in practice, once employment ends the implied duty of confidentiality survives only to protect genuine trade secrets such as secret processes. Employers are, therefore, much better protected by including express terms in the contract to protect confidential information and by defining ‘confidential information’ sufficiently widely in the contract of employment to include everything your employees may create or access whilst employed. Regularly reviewing confidentiality clauses and what they cover is helpful: as a business develops, there may be more information you would like to keep confidential.
It is also advisable for a provision to be included in the employment contract that requires an employee to return or delete any confidential information and return any company property, including passwords and login details.
Separately, contracts of employment may also contain clauses obliging employees to notify you immediately if they receive an approach or offer of employment.
If you don’t have sufficient protection by way of existing contractual provisions, but an employee is about to leave the business, you may be able to offer the employee a settlement agreement containing enhanced confidentiality protections and/or new restrictive covenants in exchange for a further sum of money if necessary (known as consideration).
What can you do if employees breach their contractual obligations?
If you can prove that an employee has breached their contractual obligations, subject to the wording of relevant contractual provisions, you could be entitled to terminate the employment contract without notice or any payment in lieu of notice (PILON) which would normally include payment of bonuses, commission and other benefits. Many bonus schemes reward loyalty as well as good performance. Bonus payments are often paid at the employer’s discretion, and it can be possible to defer payment or order reimbursement if an employee leaves within a certain period after a loyalty bonus is paid. If an employee is no longer in employment by a set payment date or is under notice by that date, they may not be entitled to be paid for that bonus period, depending on the wording of your bonus scheme.
If an employee has already left, as mentioned above, you could claim damages for any financial loss suffered or for profit lost because of the former employee’s breach of contract. Alternatively, or in addition to such a claim, you could apply for an injunction (commonly known as a ‘springboard injunction’ to prevent the former employee from misusing your confidential information to give themselves an unfair advantage over your business.
Do restrictive covenants apply on a TUPE transfer?
Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), employees being transferred to a new business retain their existing terms and conditions of employment. The incoming business (the buyer) inherits those terms, including any restrictive covenants and may try to harmonise terms. However, issues can often arise in such scenarios as the restrictive covenants will have usually been tailored to the business of the outgoing (the seller) at the time the employment contract was entered into and so may not be that useful to protect the commercial interests the buyer wishes to protect. We would therefore recommend that specialist advice is taken as to the likely scope of restrictive covenants following a TUPE transfer to ensure that a buyer’s interests are protected as far as possible.
Restrictive covenants in the case of redundancy and other dismissals
A restrictive covenant will usually run from the employee’s last date of employment (unless there is a clause in their contract stating that restrictive covenants will be reduced by any period spent on garden leave). It doesn’t matter what the reason for the employee’s dismissal is or whether the dismissal is unfair. If the restrictive covenants are otherwise enforceable, they will apply in the usual way.
Where there has been a breach of an employment contract by the employer, such as in the case of wrongful dismissal (for example, if you fail to give an employee their correct notice period they are entitled to under their contract) or in a constructive unfair dismissal case where an employee resigns in response to a breach, any terms intended to survive post termination, including restrictive covenants, cannot be enforced. Whether this applies to confidentiality clauses is doubtful.
PILONs and restrictive covenants
Including a pay in lieu of notice (PILON) clause in an employment contract will allow you to dismiss an employee and pay in lieu of the notice period (instead of the employee working for the duration of the notice period) without this amounting to a breach of contract.
Another advantage of including a PILON clause in an employment contract is that it allows the employer to define how the payment will be calculated, for example, by excluding certain contractual benefits.
If there is no PILON clause and you breach the employee's contract by, for example, dismissing without notice, the employee may not be bound by their restrictive covenants. To ensure that any restrictive covenants remain enforceable you would need to obtain the employee’s consent to receive a PILON as an alternative to working out their notice period.
Is the situation different when an employee resigns?
Apart from the case of an employee resigning in response to a repudiatory breach of contract by an employer (constructive dismissal), any restrictive covenants which are enforceable under the usual rules will continue to bind an employee after they leave their employment.
Summary
Whilst the default position is that restricting an employee’s right to work after they leave your employment is unlawful, there are ways of protecting legitimate business interests in proportionate ways, with carefully drafted and reasonably limited restrictive covenants which can be enforceable against former employees and those who try to employ them.
Precision in the drafting of these clauses can mean the difference between them being legally binding or not and so seeking professional advice to draft or review restrictive covenants is a strongly recommended investment, to give your business the best chance of being adequately protected.
