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Interpreting Restrictive Covenants in Employment Contracts

Thursday, 18 September 2014

Employers and employees should ensure that the restrictive covenants included in employment contracts are appropriate and carefully drafted. Employers must ensure that they are adequately protected while employees should aim to avoid being unduly restricted if they move to a new job.

It should be noted that the courts are willing to enable employers to protect themselves proportionately but clauses that are drafted to widely are likely to be unenforceable. At the same time the recent case Prophet PLC v Huggett [2014] makes it clear that employers should make sure that the specific restrictions will actually be effective in offering them protection.

Background to Prophet PLC v Huggett [2014]

Although courts will not usually ‘add words’ to covenants in order to ensure that they are enforceable and reflect the will of the parties, the original hearing of the Prophet case indicated that this may be done in circumstances where covenants as they are written offer no protection to the employer.

Mr Huggett worked for Prophet, a company designing software for the fresh produce sector. Through a restrictive covenant in his employment contract, Prophet sought to prevent Mr Huggett from joining another company for 12 months after leaving. However, the restrictive covenant as written only prevented Mr Huggett from selling Prophet’s software which was not available for retail by others, rendering the covenant useless.

The trial judge ordered that the covenant should be interpreted in order to protect Prophet’s interests, as intended. This decision was reversed on appeal though, as the original covenant was unambiguous in meaning.

Reminders for Restrictive Covenants

Restrictive Covenants are clauses written into employment contracts which place certain conditions or restrictions on employees for a predefined period after their employment with a particular company has ceased. They are primarily used by companies in order to protect their business interests.

Restrictive covenants can include:

· Confidentiality and disclosure clauses – these can prevent previous employees sharing client and customer information with competitors. Designs and concepts can be protected too.

· Non-solicitation and non-dealing clauses – these prevent previous employees from approaching existing clients in their new employment, or from dealing with existing clients in the course of their new employment or their own business.

· Geographical restrictions can be placed on former employees. For example they may not set up a similar business within so many miles of their previous employer’s or they may not work for a competitor for a stated number of years. However, these can be more difficult to enforce, particularly if they significantly restrict or damage an employee’s ability to find new employment, unless unusually restrictive measures are required due to national security or trade secrecy.

Important Factors for Making Restrictive Covenants Effective

· To be valid and enforceable, any restrictive covenants must be reasonable. This means that they do no more than protect legitimate business concerns at the time that they are entered into. For example, it would be unreasonable to dictate that an employee could not work in car manufacture. However, a covenant could state that an employee may not work in luxury car engine development for a rival firm for a period of 12 months following the end of their previous employment.

· Covenants must be drafted carefully, as courts are reluctant to interpret documents in order to establish the intentions of the parties involved if these are not immediately clear.

· In order to increase the likelihood of covenants being enforced by the courts employers should take the following steps:

- Ensure that they are reviewed regularly, so that they still reflect and protect your business needs and interests effectively in changing business climates.

- Regular review will also prevent the courts from viewing any restrictive covenants as ‘unreasonable’.

For specialist employment law advice please contact Aneil Balgobin via e-mail or by telephone on 0207 611 4848.

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