What is the purpose of a Restrictive Covenant?

Every business has proprietary information that it is crucial to its success. Restricting the use of this information by employees when they leave is vital in order to protect your market position. 

An ex-employee who has been privy to your client base and trade secrets may be an attractive asset to a competitor seeking access to your market. 

As an employer you will naturally want to protect the use of this information by the inclusion of restrictive covenants in the contracts of employment of senior or key staff. 

However an employer is NOT generally entitled to protect himself against competition from his ex-employees. So where a non-compete clause is enforced it has to be to protect a legitimate business interest – for example, client connection or confidential information – and not simply to stifle or prevent competition. 

The standard types of restrictions which can be used by employers are: 

• restrictions on the former employee working for a competitor – commonly known as area covenants;
• non-solicitation covenants – which prevent poaching clients/customers of the former employer;
• non-dealing covenants – which prevent a former employee from dealing with former clients/customers, regardless of which party approached the other;
• non-solicitation of staff covenants – which usually are restricted to those employees the former employee had material dealings with in a defined period prior to the termination of their employment. 

For a restriction to be reasonable it must not be drafted too widely. It will be for the employer, in the event of a clause being challenged, to show that the clause is justified and sufficiently narrow. To meet these criteria an employer must be mindful of certain factors: 

• The breadth of the geographical area of any restriction and length of time of the post termination restriction must be justified. It is unlikely that a wide geographical area will be justified and, as a general rule, a restriction for more than twelve months(1) will be difficult to justify.
• Regard will also be had to the type of interest being protected, for instance, information such as trade secrets may be granted a wider area of protection than information regarding customer information, given that its potential use across markets is wider.
• An employer may also be required to provide evidence any connection between the employee and any information that is being protected. 

The extent of clauses, therefore, must be relative to the employee’s position within the business. As more senior employees will be in contact with more sensitive information, restrictions placed upon them may be justified as being more onerous. Overall, a one-size fits-all policy on restrictive covenant clauses risks the clause becoming unenforceable and therefore not being able to protect your business. 

It is advisable to draft each clause separately. That way, should any single clause fail for reasonableness or necessity, it may be severed from the contract by the court without affecting any of the remaining clauses. Restrictive covenants may also require periodic review in order to maintain their enforceability and reflect the activities of your competitors and market trends. 

For help or advice on protecting your business, please call Deminos on 0191 460 1111 or email info@deminos.co.uk 

(1)Judgement in ETA by Wyn Jones (Kynixa Ltd v Haines), in which he concluded that 12 months is considered a reasonable period and that, although the restrictive covenants were very wide, even so they were reasonable and enforceable. 2008

This entry was posted on Wednesday, October 22nd, 2008 at 3:03 pm and is filed under Human Resources. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.