Use of Restrictive Covenants in Employment Contracts

Employers may want to place restrictions on people who have worked for them after the employment contract ends by way of protecting the business. This can be done legally by adding ‘restrictive covenants' into the contract of employment, and this means that the employee accepts the restriction and the business remains protected.

The following article explains the use of restrictive covenants in employment contracts, detailing when they can be used, what protection they can offer and how they are enforceable.

When can a restrictive covenant be legally applied?

A restrictive covenant is only legally enforceable if it is applied to offer protection to the interests of the business. If it cannot be demonstrated that the restrictive covenant serves to protect the business, its inclusion in an employment contract will be deemed as an unlawful restraint of trade. There are two business interests that are recognised for restrictive covenants, and they are:

• Trade Connections (including customers and employees)
• Trade Secrets and Confidential Information

The restrictive covenant can be legally enforced as long as it does not attempt to be more restrictive than it needs to be and is only used to protect one of the interests named above. Restrictive covenants will be bound by geographical and time limitations and will therefore only be enforceable for a temporary period.

What restrictions can be applied?

There are a number of limitations that can be placed on previous employees through a restrictive covenant. They include:

• Inhibiting a previous employee from taking customers. A restrictive covenant can prevent an employee from poaching customers of the business after they have left. Many financial firms include this restriction as well as businesses where employees have built strong relationships with customers. This would make it illegal for the employee to take the contact details of customers with them or attempt to contact them to secure their business with a new competing employer.
• Protecting the workforce. A restrictive covenant can serve to protect the rest of the workforce by stopping a previous employee from attempting to poach other employees. This will be a legally enforceable limitation as the stability of the workforce is paramount to the security of the business interests. The restriction will usually only be enforceable when it relates to employees at the same level as the former employee or those in more senior positions.
• Prevent the Former Employee from Working for Competitors. In some instances, it may be appropriate for an employer to add a restrictive covenant to an employment contract that prohibits an employee from working for a competitor once they leave the business. This may be the case when an employee is considered to have a significant influence over customers, and this influence may lead to customers leaving the business for a competitor.

Important Considerations When Creating Restrictive Covenants

It is important that when restrictive covenants are drafted, they are done so with thorough consideration and legal observance. This will ensure that they are accurately reflective of an employee's position and duties within the business as well as cover the needs of the business.

In order to be legally enforceable, the restrictive covenants should not go further than is necessary. If a restrictive covenant is not drafted correctly from the outset, it may be that they are not legally enforceable and that a court will not adhere to them, leaving the business unprotected and the restrictive covenant unenforceable.