Is it time to review your restrictive covenant clauses?

Restrictive covenants and their enforceability are always a topic of discussion in employment law. More recently, in the case of Law by Design v Ali which involved two 12 month non-compete clauses, one in an employment contract and the other in shareholder’s agreement. The High Court however decided to uphold the covenant only in the employment contract and not the shareholders’ agreement.

Below are five key areas that should be considered when drafting or review restrictive covenants.

  • Covenants in employment contracts should protect legitimate business interests

For a post-termination restriction to be enforceable, an employer must demonstrate that the covenant is protecting a legitimate business interest.

The legitimate interests that a company is seeking to protect are normally contained within the employment contract, therefore, the drafting of restrictive covenants in employment contracts have to be considered carefully as an employer will not be able to rely on a different interest at a later stage without amending the contract. Generally to amend the contract the employer would have to seek the employee’s approval.

  • Covenants should be drafted so that they are not wider than reasonably necessary for the protection of legitimate interests.

Courts are likely to consider the following when determining reasonableness:

– the status of the employee;

– the duration of the covenant;

– the geographical extent of the covenant;

– the position at the time the contract was made;

– the normal industry standard for such covenants;

– the employer’s business and the nature of the market; and

– the harm or potential harm caused by enforced the covenant.

In the case above, the covenant in the employment contract survived because it was limited whereas the covenant in the shareholder’s agreement was much wider as it covered direct and indirect competition and also competition with parts of the employer’s business in which the employee had no or very little involvement. It is therefore essential to ensure that a non-compete covenant is restricted to parts of the business the employee was actually involved in.

  • Reviewing restrictive covenants of employees who are promoted

It is important that a new contract with new restrictive covenants is signed when an employee is promoted. This is because the courts will consider the reasonableness of covenants at the time when the covenants were entered into and the role of the employee at that time.

  • Widely drafted restrictive covenants are not always void

Courts are able to remove an unenforceable provision from a non-compete clause and leave the part that is enforceable however it is better to spend some time drafting a good non-compete clause to avoid being in a situation like this in the first place.

It is essential that the wording of restrictive covenant clauses are drafted carefully and BBM solicitors can guide you on this process.

 

If you want to discuss any of the issues raised in this Blog, Vajiha Ali from our employment team would be happy to help and you can contact her on vah@bbmsolicitors.co.uk or speak to her on 01955 604188.