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Restrictive covenants

In tough economic times employers are likely to want to protect themselves by including restrictions in employment contracts to apply when employees leave. In the absence of express clauses setting out an employee’s obligations after termination, the restrictions implied into employment contracts are limited and do not generally extend to the period after termination of the contract, whereas express restrictions can.

Post-termination restrictions protect a business’ interests by restricting an ex-employee for a period of time after employment. Whether such clauses can be enforced depends on the circumstances. Unless a restriction protects a legitimate business interest (trade connections, secrets or confidential information) it will be an unlawful restraint of trade and void.

Once you have established a legitimate business interest, a restriction is only enforceable if it goes no wider than necessary to protect it. The restriction should be limited in time and geographical area. Although in some cases a worldwide restriction has been upheld by the court, this will be exceptional. What is acceptable in one industry may not work in another. You also need to consider the role of the employee, a restriction that would be acceptable in a manager’s contract is unlikely to be acceptable for a secretary.

Aside from confidentiality clauses, broadly, there are three types of restriction:

• Non-solicitation clauses preventing an ex-employee from soliciting colleagues or customers. To be enforceable, generally the restriction should only apply to customers who came into contact with the employee within a period of time before they left, how long depends on a number of factors including the time it would take the employee’s successor to gain influence over contacts, seniority and customer loyalty.

• Non-dealing clauses preventing an ex-employee from any dealings with your customers or employees. Unlike with non-solicitation covenants there is no need for the ex-employee to have made the approach, but the clause is wider in scope so could be harder to enforce.

• Non-compete clauses preventing an ex-employee from working for competitors. Although recently there have been a number of cases where non-competition restrictions have been upheld by the court, these have traditionally been harder to enforce. The reason for this is that as a matter of general law employees are not permitted to disclose confidential information that would amount to a trade secret and express confidentiality clauses can be included in contracts. As a result any additional restriction may be viewed as unnecessary. These clauses are more likely to be enforced where a non-solicitation or confidentiality clause would not work, for example where the ex-employee’s hold over customers is such that the only effective protection will be to ensure they are not engaged with a competitor at all for a period of time.

We recommend that advice is sought whenever these clauses are being contemplated, whether a clause is appropriate in a given case is very fact specific.