In today’s competitive business environment, protecting your company’s sensitive information, client relationships, and key employees is critical. This is especially true for small businesses, where the loss of a client or valuable insider knowledge can have a significant impact.
Restrictive covenants—clauses in employment contracts that limit what employees can do after they leave your business—are a common way to safeguard these interests. However, they must be carefully drafted to strike the right balance between protecting your business and respecting employees’ rights.
In this article, we’ll explore the purpose of restrictive covenants, the types of restrictions available, and how to ensure they’re enforceable.
What are restrictive covenants?
Restrictive covenants are contractual clauses designed to protect your business from harm caused by departing employees. These clauses place limits on employees’ activities after they leave your company, covering things like working for competitors, soliciting clients, or sharing confidential information.
While restrictive covenants can be invaluable, they’re not automatic or absolute. Courts will only enforce them if they are deemed reasonable, proportionate, and necessary to protect legitimate business interests.
Types of restrictive covenants
There are several types of restrictive covenants, each serving a specific purpose. The most common include:
1. Non-compete clauses
These prevent an employee from working for a direct competitor or starting a competing business for a specified period of time after leaving your employment.
Example: A sales manager is restricted from joining a rival firm within the same city for six months after leaving your business.
Key consideration: Non-compete clauses must be reasonable in terms of duration, geographical scope, and the level of restriction placed on the employee.
2. Non-solicitation clauses
These prevent employees from approaching your clients, suppliers, or other business contacts to take their business elsewhere.
Example: A departing employee is prohibited from contacting your key clients to offer similar services for 12 months.
Key consideration: Clearly define the scope of this restriction (e.g., specific clients or business partners).
3. Non-poaching clauses
These prevent employees from soliciting or recruiting your other employees to join them at a new company.
Example: A former team leader is barred from approaching members of your team to join a competitor for nine months.
Key consideration: This type of clause is particularly important for retaining talent and avoiding disruption to your team.
4. Confidentiality clauses
While not strictly a restrictive covenant, these clauses are designed to protect your business’s sensitive information, such as trade secrets, financial data, or client details.
Example: A departing employee is required to keep all proprietary information confidential indefinitely.
Key consideration: These clauses are often enforceable without time limits but must not overreach (e.g., claiming ownership of publicly available information).
When are restrictive covenants enforceable?
A restrictive covenant will only be enforceable if it meets certain criteria:
1. Legitimate business interest
The restriction must aim to protect a genuine business interest, such as confidential information, client relationships, or maintaining a stable workforce.
2. Reasonableness
The clause must be proportionate in scope, geography, and duration. For example, restricting an employee from working anywhere in the UK for five years is unlikely to be enforceable, whereas limiting competition within a local area for six months might be.
3. Tailored to the role
One-size-fits-all restrictions are unlikely to hold up in court. A non-compete clause for a junior administrator, for instance, is much less justifiable than one for a senior sales executive with access to key clients.
Common pitfalls to avoid
Restrictive covenants are a complex area of employment law, and small businesses often make mistakes that render them unenforceable. Here are some common pitfalls:
Being overly broad: Clauses that are too vague or far-reaching are unlikely to be upheld.
Failing to update contracts: As employees are promoted or roles change, restrictive covenants should be reviewed and updated to reflect their new responsibilities.
Using generic clauses: Boilerplate restrictive covenants may not suit the specific needs of your business or the employee’s role.
How to implement effective restrictive covenants
To ensure your restrictive covenants are enforceable and effective:
1. Tailor clauses to the role
Customise restrictive covenants for each employee, considering their level of seniority, access to sensitive information, and client relationships.
2. Be reasonable
Avoid overreaching. For example, instead of banning an employee from working in the entire industry, limit the restriction to direct competitors in a specific region.
3. Seek advice
Restrictive covenants are a legally sensitive area. Consulting an employment solicitor or HR expert can help you draft clauses that are enforceable and aligned with your business needs.
Final thoughts
Restrictive covenants are a vital tool for small businesses, helping to protect your interests when employees move on. However, they must be carefully drafted to be both effective and enforceable.
By tailoring your covenants, keeping them reasonable, and seeking professional advice, you can safeguard your business while respecting employees’ rights.
If you’d like help reviewing or drafting restrictive covenants, get in touch, to ensure your contracts provide the protection you need.