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Restrictive Covenants in Employment Contracts

Wednesday, 12 December 2012

All companies have information about their business that they would like to prevent from falling into the hands of competitors. That information may include client contact details, internal systems and processes, strategic plans for the future or trade secrets.

There is no real way to guarantee that confidential information will never end up in the wrong hands. Even where breaching confidentiality might be illegal, information can still be leaked – think of the Swiss bank account details that have been leaked to tax authorities in various European countries. However, employers can use restrictive covenants in employment contracts to reduce the risks. If you are an employer this is certainly something you should consider.

Restrictive Covenants

Restrictive covenants are normally inserted by companies into employment contracts to discourage former employees from damaging the company when they leave. Restrictive covenants take the form of non-solicitation clauses, non-dealing clauses and non-compete clauses.

Non-solicitation clauses attempt to prevent the former employee from approaching customers of the business they have left and persuading them to move their business. Non-dealing clauses are more comprehensive and seek to stop former employees from dealing with customers they worked with during their previous employment. Non-compete clauses attempt to restrict the employee from working for a competitor for a fixed period; these are often combined with garden leave provisions.

Effectiveness of Restrictive Covenants

The effectiveness of restrictive covenants comes down to a number of factors. First off they will generally have a deterrent effect by discouraging leavers from doing things that are likely to be detrimental to the company. Secondly they will, if correctly drafted, have legal force that will enable an employer to seek injunctions or damages if they are breached.

It is in respect of the latter, there are a number of finer points that need to be considered to prevent the clauses being void when tested in a court room. Importantly, clauses cannot be drafted so widely that they would have the effect of reducing competition. It is an established common law principle that restraint of trade clauses in contracts should not be enforceable.

Restrictive covenants must be no more restrictive than is necessary to protect the legitimate interests of the company. This must be reasonable in the context of the relationship between the parties and the information which the company seeks to protect. They should not have the effect of stifling competition. Therefore the geographical area, the length of time they operate (typically not more than 6-12 months) and the former employee’s connection to the information will all be relevant to their enforceability.

If you would like more information in respect of restrictive covenants in employment contracts or other Employment matters, Rollingsons has experienced lawyers who can advise you. Please contact Aneil Balgobin via e-mail or by telephone on 0207 611 4848.