UK: Restrictive Covenants In Employment Contracts - Are They Worth The Paper They Are Written On?

It is a widely held view that restrictive covenants in employment contracts are unenforceable and are a waste of time.

This view is completely wrong!

A well drawn restrictive covenant, tailored to the individual concerned will be valid and enforceable and is a most valuable asset for any business which has any secrets or customers that it wishes to keep.

There are two main reasons why it is thoroughly worthwhile having restrictive covenants. These are:-

1. If an employee leaves you and acts in breach of the covenant you can go for an immediate injunction stopping both him and the company that he has gone to from acting in breach of the covenant.
2. (And arguably the more important reason) the existence of a restrictive covenant acts as a very real dis-incentive for the employee to leave at all

In other words if your company has an employee on a well drawn restrictive covenant there is a good chance that he will not even look for another job with a competitor but, even if he does, it is likely that that competitor will ask to see his contract. If the competitor (probably through his solicitors) takes the view that the restrictive covenant on your employee is valid and binding they will not even offer him a job.

Thus the existence of the restrictive covenant is likely to discourage (a) your employees from leaving you in the first place and (b) a competitor offering them a job when they see what the contract says.

Restrictive covenants do not just protect secret formulae. They protect all confidential information that is genuinely confidential to the company. In other words:- a list of your customers; or your price and discount structure; or your management information etc. etc.

You cannot stop an employee from using his "skill and knowledge" even if he acquired that skill and knowledge whilst working for you. This means that, for example, if you employed a carpenter who had learnt a new method of, say, turning a chair leg then this would become part of his skill and knowledge and he would be free to make use of it for a competitor.

There are a number of types of restrictions which you can impose upon an employee. There are restrictions on area, restrictions on time and restrictions on customers.

In simple terms in appropriate circumstances you can restrict an employee from operating within a given radius for a given length of time or from seeing specific or general customers.

It is a matter of judgement as to precisely which type of restriction is appropriate.

In general the tighter the restriction the more chance there is of it being enforced by a Court. So if your employee operates within, say, a 20 mile radius of your premises if you restrict him to say 15 miles it is likely that the restriction will be enforced. If you restrict him for say 25 miles it is likely that the restriction will be totally struck out and you will have no restriction on him at all. The same applies to time restrictions.

Perhaps the best (and easiest to enforce) are those restrictions which stop your employee touting for the business of your existing customers. Courts will readily enforce such covenants as quite obviously your own customers are, to all intents and purposes, an asset of the business and it is not right that an employee should effectively steal away those assets by using the knowledge which he gained whilst working for you for his own or someone else’s benefit.

There is no such thing as an enforceable blanket restriction. It is easiest to illustrate this point by giving two examples of famous cases. The first case involved a solicitor who was working for a firm in High Holborn in London. His restriction stopped him from working for a competitor within a radius of 400 yards of his office. The second case concerns a salesman working for a heavy artillery manufacturing company whose area of work and whose restriction was the northern hemisphere of the world.

You may be surprised to find that the restriction on the salesman was upheld and the restriction on the solicitor was held to be too wide.

The reasoning is impeccable. The Court had to decide what damage would be caused to the employer’s business by the employee operating within these restricted areas. There are hundreds of firms of solicitors within a radius of 400 yards of High Holborn and the Court took the view that there would be no damage caused to the business if this solicitor were to operate from say 300 yards away. Conversely as very few items of heavy artillery are sold and as the salesman’s area of business was in fact the northern hemisphere then if he was not stopped from operating within that territory considerable harm would be caused to the gun manufacturing company.

However this does illustrate quite neatly the importance of tailoring the restriction to the particular circumstances.

A well drawn restrictive covenant is an eminently sensible and commercial thing for a company to have. The obvious benefit of being able to enforce the covenant by injunction proceedings in the Court is in fact the less important reason. The real reason for having such a covenant is that it really does discourage employees from leaving your employ in the first place. No intelligent competitor is likely to run the risk of proceedings being taken against it not only for an injunction but also for damages.

A way advises Company will consider carefully which of its employees could seriously hurt the business if they joined a competitor and then to find a way to get them signed up on a restrictive covenant. It is however absolutely vital that the covenant is tailor made by expert commercial solicitors or you will be wasting money. An inducement to sign a new contract may be required where the employee already has a contract with no restrictive covenant in it.

So you now have an employee who has signed an expertly drafted restrictive covenant. Are you safe?

The answer is "yes" as long as you do not do anything wrong.

By this we mean that if you, as the employer, breach the terms of your contract with your employee in a fundamental way then you will cease to have the protection of any part of the contract and in particular you will cease to have the protection of the restrictive covenant.

The reasoning for this is logical and fair. If you do something to "repudiate your contract with your employee" e.g. refuse to pay him his salary; insist on him working in Scotland whereas his contract requires him to work in Truro; insist that he cleans the toilets when he is in reality the Finance Director then you are clearly in breach of the contract yourself.

If it is you who is in serious breach of the contract the employee is entitled to say that your actions have brought the contract to an end and that therefore, if it is at an end, then he is no longer bound by any terms of it either. He will then be released from his restrictive covenant.

Very minor breaches of contract will not have this effect. E.g. paying the employee a day late (occasionally).

Thus, providing you are careful, your restrictive covenant will remain valid.

This highlights the importance of taking expert legal advice if you are thinking of getting rid of a senior employee who is on a restrictive covenant.

Almost always you will know some time in advance that you are planning to do away with his services and it is at this early stage that you should make contact with us. We will try to guide you in such a way as to maximise your rights and opportunities generally.

A particular point to watch for is the employee who writes to you indicating that he is "thinking of leaving you and joining a competitor". Unless you respond promptly and carefully you may fall into a trap.

This trap arises because you will want to be sure that you can get an injunction against your employee if he breaches the restrictive covenant. An injunction is what is known as an "equitable remedy". This means that the Court will only give you an injunction providing it is fair and reasonable in all the circumstances for an injunction to be granted.

There are many things which are taken into account in deciding whether it is fair and reasonable but two of those which are most relevant are "delay" and "encouragement".

Taking these two points in turn;

If you do not act quickly a Court will not give you the urgent remedy of an injunction. In other words if you sit on matters, even for some days, then you may lose the opportunity to get an injunction (although you may still be entitled to damages- if its worth pursuing !)

Similarly if you do anything which in any way encourages the employee to think that you will not seek to stop him (even by ignoring his letters) again it is possible that the Court may say that you have brought the problem upon yourself and therefore you will not get your injunction.

Thus if you get the letter from the employee which says he is "thinking of leaving and setting up in competition with you" then warning bells should ring immediately and your response should be speedy and carefully drafted.

There is no point in spending money on having carefully drawn tailor made restrictive covenants if you lose the opportunity to enforce them by failing to take the appropriate action at the right time. Speak to us early and we will maximise your opportunities.