Once a contract of employment has ended, there are no implied restrictions on an employee, other than a prohibition on the employee disclosing confidential information. In order to protect its business, an employer may choose to put further restrictions on an employee, e.g. to prevent him from working for a competitor after his employment has ended, by including an express term in the contract of employment. Such an express term is known as a restrictive covenant.
The courts look unfavourably on any provision which restrains an employee from earning a living in the future (a so-called ‘restraint of trade’). Therefore, the basic premise is that all restraints are prima facie void and unenforceable unless they:
- protect a legitimate interest of the business (e.g. customer connections, stable workforce, trade secrets); and
- go no further than is reasonably necessary to protect that legitimate interest.
To ensure enforceability, the covenants must be tailored to suit the requirements of each individual employment situation and should be reviewed regularly.
Types of restrictive covenants
There are 3 common types of restrictive covenants:
1. Non-competition – these prevent the ex-employee from working for a competitor or setting up a competing company.
2. Non-dealing – these prevent any dealings between the ex-employee and customers (even if the customers approached him).
3. Non-solicitation/poaching – of customers (prevents the ex-employee soliciting business of customers) or of staff (prevents the ex-employee poaching members of the team to join a new business).
Blue pencil test
The court will not rewrite restrictive covenants to make them enforceable. However, it may strike out the unenforceable part of a restrictive covenant clause (e.g. an offending word) but will only enforce the remainder of the clause if it makes independent sense. Any enforcement of restrictive covenants by the court will be at the minimum level needed to protect the employer’s legitimate interests.
Reasonableness factors
These factors are used to assess the reasonableness of restrictive covenants:
- The duration of the restraint – should not be longer than is necessary
to protect the interest (e.g. how long will the information remain
confidential?) - The geographical scope of the restraint – this may link into the needs of the business (e.g. where is its customer base?)
- The needs/interests of the business – is the nature of the business global or local? Is it very specialised?
- The duties of the employee – how senior is the employee? How much influence does he have over clients or staff? Does he in fact have any contact with clients at all? There is no real justification in having a nonsolicitation clause for someone who never had any client contact.
- The interest that the business is seeking to protect and whether a lesser restriction would suffice. For example, bearing in mind the other reasonableness factors, is the clause as drafted wider than is necessary to protect the employer’s business interest? Could customer connections be adequately protected by a non-solicitation clause rather than a more draconian non-competition clause?
The effect of wrongful dismissal
If the employer dismisses an employee in breach of contract or if the employee resigns as a result of a constructive dismissal then any restrictive covenants are unlikely to be enforceable. This is because the employer will have committed a repudiatory breach of the underlying employment contract entitling the employee to free themselves of their obligations under the contract.