Restrictive covenants are a useful method of protecting a business and they may be inserted into the employment contracts of all levels of employees. It makes sense to know why they are used, how they are enforced and what an employee can and cannot do if there is a restrictive covenant in place.

There are four common types of restrictive covenants:

• Non-competition covenants
• Non-solicitation covenants
• Non-dealing covenants
• Non poaching covenants

What is a restrictive covenant?

A restrictive covenant is a clause in an employment contract that essentially stops an employee from behaving in a way that might damage the previous business where they worked, after their employment is terminated. They are not, of course, meant to restrict free competition in the marketplace. However, the most common form of restrictive covenant is a non-compete clause which prohibits a former employee competing with his or her employer once the contract is finished or the work project comes to an end. It may prohibit them working for a competitor or setting up on their own in direct competition with their former employer for the length of time set out in the covenant.

Non-solicit and/or non-dealing covenants are included in employment contracts to stop an employee making use of contacts such as clients, customers, suppliers and so on, that they gained or had access to while employed. A non-poach clause prohibits a former employee from enticing other employees away from the original business to work for a competitor, either themselves or another business enterprise.

The covenant can also be drafted to mean a former employee cannot use sensitive product or other information during the period prescribed by the covenant.

How long does the covenant last?

Most restrictive covenants stipulate a specific time period of generally six to twelve months, during which the ex-employee is prohibited from competing with the former employer, but in practice it would be difficult to enforce such a covenant beyond twelve months.

What else is included?

Some businesses may find it beneficial to prescribe a geographic area in the restrictive covenant, for example by restricting someone from working for a competitor in a 20-mile radius. Restrictive covenants may also cover business or trade secrets and information such as contract details for customers, clients or suppliers.

How is a restrictive covenant implemented and enforced?

It is good practice to include a restrictive covenant in the original employment contract, otherwise the employee may have a bargaining position and insist on higher pay or simply refuse to sign a new contract later on.

If an employee has been dismissed or made redundant and the employer has breached the terms of the employment contract, it is possible that the restrictive covenant will be unenforceable. Therefore, an employee who wants to get around a restrictive covenant may sometimes claim constructive dismissal at the end of their employment contract and a breach by the employer. This is not advisable for the employee as they will generally lose wages but can cause problems for an employer.

If the restrictive covenant is being breached post-employment the business should get in touch with a lawyer for help. You will want to review the scope of the damages caused and seek to reclaim any financial loss caused by the actions of the former employee as well as stopping any future behaviour that may cause further financial or other damage. Your lawyer may advise that injunctive proceedings will be the most effective way of dealing with the issue as it will be resolved in court, but in the first instance will probably draft a letter that refers to the restrictive covenants and addresses the damages.

What rights does the employee have?

The restrictive covenant cannot be unreasonable. It cannot stop a former employee making a living from their chosen profession or trade. If for example, it attempts to stop an ex-employee from working for a competitor anywhere in the world for five years it is likely to be considered unreasonable. The employee could bring a claim against his or her former employer for unreasonableness and if successful, the restrictive covenant would be void. It is therefore crucial that the restrictive covenant in the employment contract is drafted with validity and scope in mind, so that it will be enforceable post-termination.

If you or someone you know wants more information or needs help or advice, please contact us on (023) 9225 9822 or email [email protected]