Restrictive Covenants

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Blacks Solicitors have one of the largest employment law teams in Leeds, and can advise you and your business on all aspects of Restrictive Covenants and other post-termination restrictions; including their enforcement.

Employees are the ‘plant and equipment’ of your business. However employees are free to leave and when they do there is a risk that they will work for a competitor (and in so doing they will give that competitor an advantage which would not otherwise be available to them).

In order to understand the extent to which you can legitimately restrict an employee after they leave, it is important to understand both the restrictions which the law imposes on employees as well as the principles relating to Restraint of Trade.

Duties of Employees and Directors

An employee has a number of “common law” duties including an obligation of good faith. It is the obligation of good faith (sometimes referred to as the “duty of fidelity”) which is the most important in this context. The obligation has effect with regard to:

  • Not taking advantage of any approach initiated by a customer/supplier even though that approach has not been solicited or encouraged by the employee
  • Not competing with an employer, even in spare time
  • Preparing for competitor activity
  • Steering prospective orders towards a fledgling business which come to them whilst they are still an employee

A director (and sometimes a senior employee) additionally owes the following “fiduciary” duties:

  • A duty to act in good faith in the company’s best interests
  • A duty not to place himself in a position where his interests (or those of any other person, firm or company) conflict with those of the company or their duties owed to the company
  • A duty not to use or cause to be used for any purpose other than furthering the interests of the company any information or opportunity available to them as a result of their position

Restraint of Trade

This is a Contract or contractual provision which limits an individual’s freedom to work. It may be justified as reasonable and may be enforced if it is:

  • Reasonable (in terms of its extent)
  • In the interests of the parties
  • In the public interest

In order for any restriction to be enforceable there must be an interest which it is legitimate for the employer to protect. The only reasonable justification for upholding a Restraint is that there is some proprietary right, whether a client/customer connection, or a trade secret, which it is reasonably necessary to protect. A Restraint will never be upheld simply to prevent competition or to prevent an employee from using acquired know-how.

The restriction must be reasonable and must offer no more than adequate protection to the employer. Somewhat bizarrely, reasonableness is tested by reference to the time when the Contract or Restriction was entered into. As a consequence, a Restriction which was hopelessly wide as regards a junior employee at the time when the Contract was entered into will not be “cured” by the subsequent promotion of that employee to a point where, other considerations apart, the Restriction would be reasonable.

Factors which are often taken into account in judging reasonableness include:

  • The employee’s seniority
  • The type of business which is sought to be protected
  • The contractual notice period
  • The interrelationship between “temporal” and “geographic” restrictions
  • The availability of other appropriate forms of restriction

Area Covenants

These have become far less effective as modern business practice has evolved. Nonetheless, Area Covenants may still be appropriate for businesses with localised customer bases. Conversely, the globalisation of business is such that it may, in appropriate (and exceptional) circumstances, be possible to justify a Worldwide Restraint.

However, there must be a real functional relationship between the prescribed area and the area in which the former employee operates.

Non-Solicitation Covenants

This is a common form of protection. However, you must show a “special” trade connection with the customer/client which the former employee will be in a position to take advantage of, if not restrained.

The Restriction should only relate to customers who were doing business when the employee was employed and with whom the employee has had recent contact. The fact that an employee initially brought customers to you when starting employment doesn’t preclude a Non-Solicitation Covenant.

The fact that customers may no longer wish to deal with you will not necessarily prevent a Restriction from being upheld.

Non-Dealing Covenants

It is often difficult to define what amounts to “solicitation” and equally difficult to prove that solicitation has occurred. As a result, Non-Dealing Covenants are often used. However, as these are more restrictive, the duration and geographic coverage may need to be reduced in order to render them “reasonable”.

Non-Poaching Covenants

It is recognised that you have a legitimate interest in maintaining the stability of your workforce which you have spent time and money recruiting and training. However, the reasonableness of restriction can be improved dramatically by restricting it to employees at a particular level of seniority.

Non-Competition Covenants

You don’t have the right to freedom from competition. However, because it is often difficult to police confidentiality, Non-Competition Covenants are still frequently included in employment contracts to protect confidential information.

Non-Competition clauses are generally used to protect trade secrets and confidential information. However, you must be ready to show a need to protect such information and genuine reasons for fearing difficulty in policing other forms of restriction.

Although the protection of trade connections is normally the province of Non-Solicitation and Non-Dealing Covenants, a Non-Competition Clause may be justified to protect those connections. Courts will generally prefer a Non-Solicitation Clause.

 

If you would like assistance with introducing or enforcing Restrictive Covenants, please email or call our Employment Law team today on 0113 207 0000 for a free no obligation discussion.