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Restrictive Covenants: Protecting your business from directors’ and employees’ unscrupulous practice

Updated: Nov 25, 2021

Are you ready to grow your business with new employees and directors? Have you thought about how to prevent theft of your company’s clients and secrets? Maybe you have had issues with this in the past? Or maybe you just want to be certain that the clauses in your employment and directors service contracts are valid? In this article we will cover all of this and more by answering the following questions:

  1. What are restrictive covenants?

  2. Are restrictive covenants legal?

  3. Why should you include restrictive covenants in employment contracts and directors service agreements?

Restrictive covenants are very common, and it is highly likely that you have already included some restrictive covenants in your employee’s or director’s contracts.

You may think that this is great, or that if you’re already putting them in then why do you need to read this blog? The answer is that restrictive covenants are not as straightforward as you might think, and you may be inserting illegal clauses into your employee and director contracts without knowing it.

What are restrictive covenants?

Restrictive covenants, sometimes called restraint of trade clauses, are clauses inserted into employment and director service contracts that protect your business’s competitive edge. Restrictive covenants often include a combination of the following:

  • Non-competition clauses

Non-competition clauses restricting your employee or director from working for, or setting up, a competing business whilst they are working for your business or (for a specific time period) after they have left your business.

  • Non-solicitation clauses

Non-solicitation clauses are used to prevent former employees or directors from approaching (for a specific time period) any of your business’s current clients, employees and prospective clients once they have moved to a new business or set up their own business.

  • Non-dealing clauses

Non-dealing clauses are similar to non-solicitation clauses, in that they prevent contact between your former employee and or director and your current or future clients for a specific time period. However, non-dealing clauses may also prevent your former employee or director from accepting work from any current or potential clients that approach them, as well as prevent your former employee or director from approaching your clients.

  • Non-poaching clauses

Non-poaching clauses prevent your former employee or director from approaching any of their former colleagues and your current staff, for a specific time period after they have left to convince them to leave your company and work for their new employer or their own business.

  • Garden leave

Garden Leave is different to all other forms of restrictive covenants as it takes effect once your employee has given their notice, not after they have left. It prevents your employee from attending the office or working during their notice period and is more commonly found in employees and directors service contacts.

Are restrictive covenants legal?

The general rule of law is that restrictive covenants are unenforceable unless the restrictions are reasonable. This is because the courts take a very dim view of clauses that attempt to prevent a person from making a living in their chosen profession. However, there are certain circumstances in which the court might enforce them:

  • If the restrictions are protecting “legitimate business interests”.

You must be able to show that your employee’s future actions could have a detrimental effect on your business. An example of this is where your employee or director has access to commercially sensitive information or confidential information that if taken to a rival would put you out of business.

  • If the time limit and geographical area are no wider than is reasonably necessary

The amount of time and the location in which the clause will be enforceable must not be unreasonable. Covenants with time periods lasting over 2 years (24 months) are usually struck out, as are those with excessive radiuses. It is important to look at how many companies there are carrying out similar businesses to your own in the vicinity when including time and location limitations in your restrictive covenants.

Both criteria must be met for a court to enforce the restrictive covenant. If some or part of the restrictive covenant fails to meet the criteria, then that part of the clause will be struck out and the remainder enforced only if it is still appropriate to do so. If this process results in the whole clause being illegible then the whole clause will be unenforceable.

When determining the enforceability of a restrictive covenant, the Court will also consider the position of the employee and their role within the company alongside these criteria as this will have a huge impact on what is reasonable and what is not.

  • Why should you include restrictive covenants in employment contracts and directors service agreements?

Despite the difficulties mentioned above, well drafted, reasonable, and therefore enforceable restrictive covenants are still the best way for you as an employer or company director to protect your business and its interests from former employees or directors. This is in part because courts are unwilling to afford employers the protection of implied terms when they have not included any restrictive covenants in their employee or director contracts.

The benefits of including restrictive covenants are:

  • Courts are more likely to enforce them than implied terms.

  • They are easy to regulate.

  • They allow for flexibility when drafting so can be tailored to each individual employee or role in your company.

  • They can be enforced after the employee has left your company.

  • Employees view their inclusion as a deterrent.

If you haven’t included any restrictive covenants in your employee’s or director’s service contracts, then do not worry. When an employee or director hands in their notice, you can have a restrictive covenants letter drafted for them to sign before their employment comes to an end. The restrictions contained in the letter will be equally as enforceable as any that are already in employment contracts as long as there is some consideration present in the agreement.

How can Pure Business Law help?

We are specialist Employment and Contract Solicitors based in Bedford and London and operating nationally. We are experienced in drafting employment contracts and restrictive covenants letters and dealing with disputes arising from breaches of Restrictive Covenants.

If you would like to discuss the preparation of an Employment Contract or Restrictive Covenants for your business or need advice on any issues or disputes concerning a breach of an Employment Contract or Restrictive Covenant, or anything raised in this article please contact us and speak with one of our solicitors.

Pure Business Law is regulated by the Solicitors Regulation Authority and is a licensed member of the Law Society of England & Wales.

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