When drafting restrictive covenants, consideration needs to be given to:
- What is it the business hopes to protect? Is this just current clients or is there a legitimate interest in trying to protect a wider client base such as potential clients? In terms of colleagues, is it reasonable to prevent the ex-employee from taking any colleague or just those they have worked with personally? Should the restriction be limited to senior employees or those from the same team/area of the business in which the ex-employee worked?
- What length of time it is reasonable to impose a restriction for? Is it necessary to have a period of restriction of two years? If the employee is prevented from, say, soliciting a client for 12 months, does that give the current employer enough time to cement a relationship with that client? Sometimes it is necessary to consider the product the employer sells. If an insurance broker has annual renewals of its policies, then an 18-month restriction might be reasonable to get the business through one renewal cycle.
- The role of the employee in question: to what extent does the employee in question have a role in securing business? How senior are they? What is the product or service they are providing, and how long will it take for their knowledge to go out of date? In terms of soliciting staff, what are their notice periods and what is the recruitment market like?
- Are there any geographical factors to consider? Is it necessary to prevent an ex-employee from working for any competing business worldwide, or is it sufficient to limit the restriction to a particular geographical area? For example, a dentist may rely on a fairly local client base for its business; a software developer on the other hand may have clients anywhere in the world.
A court will not take a restriction it considers unreasonably wide and then amend it to make it enforceable. An unreasonable restriction will be void. Therefore, if a restrictive covenant is for 12 months, but nine months would be considered reasonable, it will not be enforceable.
How are restrictive covenants and garden leave clauses enforced?
There are several ways a business can look to enforce a restrictive covenant:
- Injunction: a business may apply for an injunction from the court. This would effectively prohibit the ex-employee from engaging in the restricted activity. Injunctions can be issued on an interim or final basis.
- Damages: the court may award a business financial compensation if it considers a restrictive covenant is enforceable and has been breached by an ex-employee. The court will assess whether the breach has caused the business financial loss and, if so, how much.
- Undertaking: the ex-employee might offer an undertaking to observe the restrictive covenants pending a full trial. Such an undertaking could be agreed between legal representatives or can be made in writing by the ex-employee to the court.
- Action against a third party: an ex-employer may pursue a claim against any third party that has benefited from the ex-employee’s breach — for example, the ex-employee’s new employer. In these circumstances, the former employer would need to be able to prove the third party induced the breach, and that because of this inducement the ex-employer suffered financial loss.
Other options
A contract of employment may provide that once notice has been given, an employee may be placed on garden leave. This means that while the employee is removed from the business and is prevented from performing their duties and contacting clients, they nevertheless remain an employee until their notice period expires.
The aim of garden leave is to keep the employee away from clients/customers long enough for their knowledge to go out of date and to give their employer the opportunity of securing any key relationships without the employee interfering.
It is important to note that absent an express right to place an employee on garden leave, doing so may amount to a breach of contract by the employer, even if the employee continues to be paid. A breach of contract by the employer potentially renders any restrictive covenants in it unenforceable.
Garden leave clauses are enforced by means of an injunction. Unlike with restrictive covenants, if a garden leave clause is unreasonably long, the court may exercise its discretion to enforce it for a shorter period than that stated in the contract.
Where an employee walks out without giving notice, or seeks to give insufficient notice, the employer may bring a claim for breach of contract and damages. But sometimes it is better tactically to seek to enforce the notice period instead.
Reform?
On May 10 2024, the UK government announced its plan to introduce legislation that would limit the length of non-compete restrictions to three months. This same limit would not apply to other types of restrictive covenant clauses such as non-solicitation clauses.
It is expected that this cap will apply to employees and workers only, and not to other contracts such as partnership deeds or shareholder agreements. The government says the new legislation comes with an intent to boost “innovation’’.
On April 23 2024, the Federal Trade Commission in the US issued a ruling banning “non-compete” clauses between employees and employers altogether, except in a few exceptional circumstances. The FTC said the ban will ultimately protect the “fundamental freedom” of employees to change jobs and “increase innovation”. Naturally, this ban will not impact employees or employers in the UK, but it will be interesting to see whether the government follows suit in the years to come.
