Restrictive CovenantsEven the smallest business can be vulnerable when key members of staff leave employment, so you may want to consider including restrictive covenants in your contracts of employment. Before you do, have a read of our top five FAQs about restrictive covenants, to make sure any post-termination restrictions you are considering are introduced as effectively as possible.

Why might I need restrictive covenants?

The idea of restrictive covenants is to protect your business. Depending on the nature of what you do, and of the role of the employee/s in question, you may want to place restrictions on working with or soliciting clients, on setting up in competition or on poaching other staff. You need to assess your business and work out where the risks are and how to reduce those risks.

Are they enforceable?

It depends. They are essentially a restraint of trade, however courts do accept employers have a right to protect their business interests so will enforce reasonable, proportionate restrictive covenants. If a clause is too broad or effectively prevents the employee from earning a living, it will not be upheld by a court. Clauses need to be the minimum restriction necessary to protect your business interests.

The chances of a clause being enforceable are greatly increased if you make the clause as specific as possible, reduce timescales of restrictions as far as you can and reduce or remove geographical restrictions as far as possible. For example a clause not allowing someone to work in competition for three years in a 50 mile radius is probably disproportionate and unenforceable. A year’s restriction in a much smaller radius is more likely to be seen as reasonable.

An indefinite restriction on working for clients is not likely to be enforceable, whereas a time-limited restriction on specifically contacting clients with whom the employee had direct dealings in the 12 months prior to termination is more reasonable.

Remember, though, a well-worded restrictive covenant will hopefully not have to be enforced by a court, if it has the effect of driving the desired behaviour from employees, i.e. preventing them from attempting to solicit clients or poach staff in the first place.

Can I introduce restrictions to existing employees’ contracts?

Clearly it is better to have restrictive covenants included in contracts from the beginning of employment, so that both parties understanding the terms and conditions of the employment before entering into it. However hindsight is a wonderful thing, and you may need to look at introducing restrictions during employment. If you do need to do so, you will need the employees’ consent to the proposed change, and are likely to need to offer some kind of incentive as well.

Can I use the same restrictive covenant for all employees just to be safe?

Restrictions are only likely to be enforceable if they are relevant to the individual role, and reasonable in reference to that role. With that in mind, it is unlikely to be sensible or worthwhile introducing a standard restrictive covenant on a blanket basis across your employee base. Consider individual roles or groups of roles, assess what the risks actually are, and introduce relevant restrictive covenants only to those for whom they would be appropriate and necessary.

Can I write something myself?

Most employers wouldn’t attempt to write their own contracts however realistically many small businesses do use templates they find on the internet, or contracts they’ve “found” in various places as a basis for their employment contracts. This is risky for several reasons, and we’d always advise getting contracts drafted specifically for your business, however this is especially important when it comes to things like restrictive covenants.

These clauses really need to be drafted by someone with the appropriate legal background and knowledge, to ensure they are relevant, appropriate, proportionate and therefore more likely to be enforceable in the event of a challenge. When it comes to protecting your business interests, investing a little in getting this type of thing done properly can really pay dividends when termination of a key employee gets a bit sticky.

 

If you want advice on drafting or enforcing restrictive covenants in your business, do get in touch.