Do I need to worry about Restrictive Covenants?

If you’re an employee it is a good idea to understand what you are committing to before signing a new employment contract. But, even if this hasn’t happened, you need to dig out your contract when leaving, so that you don’t have any nasty surprises about what you can and can’t do after you leave your employer, whatever the reason for you leaving.

1. What are post-termination restrictive covenants?

Restrictive covenants and non-compete clauses are clauses within a contract of employment or a settlement agreement which prevent a leaving employee from taking clients or key employees from their former employer, or working for a competitor. Any restrictions must be tightly defined in order to be reasonable.  This is because there is a conflict between the right of free movement, i.e. once you have stopped working for one employer you should be free to work where you want, balanced against the company’s right to protect what are known as its ‘legitimate business interests.’

Due to the balance mentioned above the general rule of thumb is that the wider the restrictions are, the less likely they are to be enforceable, but we have to emphasise that each situation is very fact specific (see below).

2. What type of restrictions can an employer place on me after I leave their employment?

The most common types of restrictions are:

1. 1. General Confidentiality

These restrictions make it unlawful for you to divulge sensitive information about your employer or its clients. These are likely to be enforceable indefinitely. The remaining sorts of restrictions mentioned below are usually time limited.  

1. 2. Non-Solicitation

These clauses will mean you cannot approach your employer’s existing clients or staff for a period after your employment has ended.

1. 3. Non-Dealing

This type of restriction will prevent you from doing business with your employer’s existing clients for a period after you leave. This could be a problem if, when you leave your job, you are likely to have a loyal ‘following’ of customers.

1. 4. Non-Compete Agreement / Clauses

This clause has broader implications than the others because it prevents you from leaving your employer to work for a company that they compete with. This clause would also prevent you from leaving your employment to set up on a freelance basis, doing work in the same field. Again this tends to be time limited. 

3. I want to leave my job and set up in business. Will the covenants in my contract stop me from doing this?

The first consideration is always has the company breached your contract? A typical example is where the company has paid you in lieu of notice when it does not have a contractual right to do so. If the company is in breach of contract then they will find it very difficult to enforce any terms in that contract, including the restrictions.

In terms of the pecking order for enforceability the most likely to be enforced is a non- solicitation clause, so you will be prevented from approaching recent clients of your former company. 

If there is a non-compete clause in your contract then you might be prevented from setting-up in business for yourself. This will depend upon whether the clause has been validly agreed, whether it is necessary to protect your employer’s legitimate business interest, and also whether it is reasonable. 

If you are concerned that your plans to set up your business might breach the non-compete covenant then you should speak to an employment lawyer to make sure you understand the potential risks. It is best to seek advice at an early stage, before you spent too much time and money setting up a new company. 

4. The covenants in my contract say I cannot work for a competitor for 12 months – is this right?

As mentioned above the general rule is that the broader the clause the less likely it is to be enforceable.  In most cases it is difficult for an employer to show that a covenant which would prevent you from working with a competitor for up to 12 months after you leave is reasonable. However, it will always depend upon the nature of your employer’s business, your position in the company, any geographical restraints and also what legitimate business interest your employer is trying to protect. In some situations, a non-compete clause lasting 12 months will be reasonable.

The general rule is that a court will not enforce a restriction that is too broad, it also won’t let a company rewrite the clause once litigation has started, however in limited circumstances it will allow unenforceable sections in the restrictions (e.g. a sentence or two) to be deleted and the remainder will then be enforceable. 

5. My employer has offered me a Settlement Agreement containing post-termination restrictive covenants – is this normal?

It is not unusual for employers to include post-termination restrictive covenants in a settlement agreement. This might be because they consider you a threat to their business, because the existing post termination covenants are not effective, or because they have breached your contract of employment and, as such, there is a danger that the covenants might become unenforceable.

If you are offered a Settlement Agreement, your employment lawyer will discuss them with you and for instance may be able to help you negotiate a larger sum of compensation from your employer in exchange for the new post termination restrictions.

6. What can my former employer do if I breach my post-termination covenants?

Breaching post-termination restrictions can be a serious matter and this is why it is important to seek advice before you do anything which might expose you to a risk of claims.

In many cases your former employer will take a view on the damage that you are causing to their business, litigation is a very costly matter (running into tens of thousands of pounds) and so we tend to find that many companies take a commercial approach when considering whether to issue a claim. The balancing act is between how much the legal costs will be, how much time will be taken up in preparing the case and attending court and that is weighed against the damage that not enforcing them could do. 

Your employer may threaten you with court action unless you stop working with their competitor or stop dealing with their clients. It is usual for employers to ask you to make undertakings before any action is taken in the High Court. They may also write to your new employer to point out that you have breached your covenants and threaten to seek an injunction if you are taking their customers. It is relatively common for a company to include your new employer in any litigation.  It is therefore important to discuss any restrictive covenants with a new employer before you join, to avoid any nasty surprises for your new employer.

If you don’t comply with your former employer’s request, they might then apply to Court for an injunction to prevent you from working for your new employer and/or approaching former clients. If successful this could result in significant costs. Not only would your own legal costs be sizeable, but your employer would also be able to recover the vast majority of their own costs as well. Your employer would have to show that they have sufficient evidence of a breach or potential damage to their business to justify taking such a step.

Your former employer could claim compensation if they have suffered any losses, for example, if you have persuaded customers to do business with you or your new employer instead of your former employer.  If you have set up your own business, your former employer might claim an account of profits.

For all these reasons it is strongly advisable to seek specialist advice if you are concerned that your next step might lead you to breach your contract and certainly to do so before you take any major steps, such as setting up a new company.

Contact us

To have a no obligation conversation about your requirements and how we can help, please either call us on 0117 290 0905 or complete a Free Online Enquiry and we will soon be in touch with you...