Restrictive Covenants

A Restrictive Covenant is a contractual term restricting an employee's activities after termination but is void for being in restraint of trade and contrary to public policy unless the employer can show that:

• It has a legitimate proprietary interest that it is appropriate to protect.
• The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.

General

An employer cannot impose a covenant merely to stop someone competing, but it can seek to stop that person using or damaging something which legitimately belongs to it. This type of restriction is to be distinguished from the duty of confidentiality that an employee owes to an employer. The duty of confidentiality is founded in common law and does not require an express restraint to be enforced. In principle, the duty applies whatever the circumstances of departure.

There can be no guarantee that any restrictive covenant will be enforceable and there are no general guidelines which can be specified as to what would be considered reasonable, for example in terms of time or geography. Each clause must be considered in each case by reference to the business needs of the employer imposing the restriction.

Protection?

To determine what rights may require protection; the employer must look at the nature of its business and the employee's position in that business.

In broad terms, the rights that a court will allow to be protected fall into two categories:

• Trade connections (with suppliers or customers) and, more generally, goodwill.
• Trade secrets and other confidential information.

As regards trade connections, an employer must be careful to distinguish its own customer connections from the personal qualities of the employee. The employer has to establish a proprietary right that was capable of being protected. For example the success of the business may solely be due to the employee's personal qualities and skills.

As regards trade secrets, it is uncertain how "confidential" a piece of information must be for it to constitute a proprietary interest that it is appropriate to protect. The courts have accepted that a secret manufacturing process is a legitimate business interest (depending on the precise circumstances). Price lists, sources of supply and customer lists are more contentious. If the information is generally known to the world at large, or if its disclosure to a third party is unlikely to be in any way damaging to the employer, it is very unlikely that it would form the basis for a protective restrictive covenant. If it is genuinely "secret" it will be sufficient.

An employer should distinguish between information and knowledge that the employee has acquired during the course of employment and information or knowledge that may be regarded as the employer's property. The courts will not prevent an employee from using experience and skill gained on the job.

If there is a legitimate interest to protect, the employer should only impose a restriction that is no wider than reasonably necessary to protect that interest. This will involve limiting the covenant not only by reference to the restricted activities themselves but also by reference to the period and (if appropriate) the geographical extent of its application. Failure to do so will probably result in the covenant being treated as having too wide a scope and being, therefore void.

Summary

The employer must therefore consider what aspects of its business legitimately require protection from its employees by way of restrictive covenants. It must then look separately at each employee and determine what level of protection is reasonably necessary in each case. What is appropriate for one individual may not be appropriate for another. For example, a high ranking employee may have more involvement in, and knowledge of, the employer's affairs than a low ranking employee; alternatively two employees on the same level may actually have differing influences over the customers and have varying knowledge of confidential information. The fact that the employer distinguishes between two employees on the same level may help to persuade the court that it has genuinely and reasonably sought to protect its interests.

Some employers provide that any time on garden leave is set off against post-termination restrictions. In practice this may be required when negotiating service agreements.

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Published: September 2011

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