Restrictive Covenants

What are restrictive covenants?

Employers can restrain employees from actions that damage their business during their employment. Just as confidentiality of information is implicit within all contracts of employment, there is an implied duty upon every employee not to compete with their employer’s business either by working for someone else or by setting up a business in competition. This duty also extends to a duty of fidelity not to solicit customers or suppliers of their employer.

Whilst every case is different, generally speaking an employee will not breach this implied term if they merely make preparations to compete with their employer. However, if these preparations go beyond a basic intention to compete and there are grounds for reasonable belief that the employee is abusing or intends to abuse their position of confidentiality, then a breach of this implied duty will arise. As before, express terms are always advisable in order to avoid any ambiguity as to the employee’s obligations under the Contract of Employment in relation to this issue.

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However, this implied duty of good faith does not apply after employment has ended. Thus, in the absence of any express obligations under the Contract of Employment, employees are free to compete with their employers. Any express contractual terms that do exist in this regard are however enforceable provided they comply with the general doctrine in relation to restraint of trade. This restraint of trade doctrine suggests that any contractual term that seeks to restrict an individual’s freedom to earn a living is in principle unenforceable. However, if the restriction is both reasonable and in the interests of the parties and/or the public, then such terms may be enforced.

Courts will closely examine the subject of a restraint to decide whether the employer is exercising a real and legitimate interest in the area that they wish to protect. This depends upon the nature of the employer’s business and the employee’s position within the business. The appropriateness of any restriction on a former employee with therefore depend on the nature of the job and the degree to which the employee had access to confidential information and has or has not had contact with the employer’s customers. The scope of a particular restraint will also depend on various factors including the length of time the restriction will remain in force, the geographical area of the restriction, and the activities restricted. A long period of restraint, for example two years, is generally less likely to be enforced than a shorter period or for example six months.

Typical examples of restraints or restrictive covenants are that they state that an employee will not:

• Compete with their former employer
• Solicit customers from their former employer
• Deal with customers of their former employer
• Solicit any of the employees of their former employer

Appropriate remedies for breaches of restrictive covenants include:

• Injunctions
• Damages
• Account for the loss of any profits based upon the loss suffered by the employer.