Why Are Restrictive Covenants Needed?

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Why Are Restrictive Covenants Needed?


Written by John Berry on 9th May 2017. Revised 23rd July 2017.

3 min read

Restrictive covenants (clauses) are used in employment contracts as a means of protecting the employer when an employee leaves.

In order to be valid they must only protect assets that are key to the firm. For example a senior manager may have access to confidential pricing information that would be useful to competitors and it would be reasonable for the employer to want to protect that. The restrictions placed usually forbid joining a direct competitor, poaching clients and employees and disclosing confidential information.

It's important that what is being protected is relevant to the job that the employee does within the firm seeking the protection. And as employee moves jobs within the firm, the restrictive covenants should be adjusted to reflect their new circumstances.

History shows restrictive covenants to be difficult to write and seldom upheld by courts. All too often they are dismissed, the court finding in the employee’s favour. The common failure is too wide a scope of restriction.

In order to enforce a restrictive covenant an employer would need to take legal action. There are some things that can be done however, before legal action is needed. The first is to ensure that the employee knows that they are (or are likely to be) in breach of their terms and conditions of employment (by moving to a competitor, for example). The second is to alert the new employer to the fact that their new employee is under a restrictive covenant and ask them how they propose to avoid being complicit in a breach of contract. If satisfactory responses are not received from the employee and their future firm, then an injunction can be sought. Bear in mind though that injunctions are expensive to enact.

Once a person advises that they are leaving and going to a competitor they should be put on 'garden leave'. This is a special kind of leave where the employee is still employed by the firm, but is not actually working. This means their access to data, including clients’ lists and other company information is restricted. Because they are still within their notice period they are not allowed to begin work with the new employer. This gives a period of time (normally at least a month) whereby the person is not interacting with clients or colleagues.

By far the best outcome is where the employee understands and respects their covenanted obligations and leaves with every intention to comply. What matters most is that damage is minimised. Litigation is seldom in anyone’s interest.