Legal-ease: Dispelling the myths around restrictive covenants
Recent case law has highlighted what employers can and can't enforce
As competition between companies becomes fiercer and the talent pool shrinks, businesses are becoming more focused on preventing an employee from working for a competitor by putting clauses into contracts that try to restrict where they work if they leave. There are many myths around such clauses:
1. They are not enforceable as it prevents you from working. Such clauses may be enforceable if an employee has confidential information that, in the hands of a competitor, would be disastrous. A covenant to stop them working for a competitor for as long as the information will remain confidential might be reasonable and enforceable. The employee is not prevented from working, just prevented from working for a competitor.
2. An employee must be paid for the period they are prevented from working for a competitor. The key test for a court is how long the confidential information will remain confidential, and this will determine if the clause is reasonable or not. Whether they are paid is irrelevant.
3. Such clauses are only enforceable against very senior employees. It is not the seniority of the employee that needs to be considered but the confidential information that they have and whether, if they told their new employer, the damage would be done.
4. These clauses cannot be imposed part-way through employment. If an employer has a legitimate interest to protect – for instance the employee has been promoted and is now privy to confidential information – then an employer can impose these restrictions part-way through employment. They would have to consult with the employee about the changes, and probably offer to pay for them to take legal advice. But if they are reasonable and the employee does not sign, the employer can terminate the existing contract on notice and offer a new contract with the restrictions in them and this will be a fair dismissal.
However, with any new covenants imposed in England and Wales (Scotland is different), there must be ‘consideration’ for entering into these covenants to make them enforceable, which is money or money’s worth e.g a promotion, a pay rise, a bonus or agreeing in consideration of keeping their job.
The very strict rules on a court’s ability to cross through unenforceable elements of a restrictive covenant have also been loosened recently. The Supreme Court decided in Egon Zehnder v Tillman that although a covenant that said an employee could not ‘directly or indirectly engage or be concerned or interested in’ any competing business was unreasonably wide because of the words ‘interested in’, these words could be crossed through and the remaining reasonable parts of the covenant be enforceable.
Every business has vital information that it relies on for its success. Restrictive covenants are there to protect this data and assuming they can’t be enforced could be a grave mistake.
Beverley Sunderland is managing director of Crossland Employment Solicitors
This piece appeared in the September print issue. Subscribe today to have all our latest articles delivered right to your desk