Restrictive covenants or non-compete clauses often feature in contracts of employment – and in settlement agreements too – but they can have a serious impact upon your future work options.
This guide covers:
- What are restrictive covenants?
- Do I need advice on the impact of restrictive covenants on my future employment?
- What restrictive covenants can feature in settlement agreements?
- What if my employment contract doesn’t mention restrictive covenants?
- When are restrictive covenants ‘too wide’?
- What happens if you break a restrictive covenant?
- Typical sequence of events after you break a restrictive covenant
- Next steps
What are restrictive covenants?
Restrictive covenants, post-termination restrictions and non-compete clauses are all the same thing. They often feature, under any one of these labels, in your contract of employment.
They are contractual terms that are often overlooked by an employee at the commencement of employment, usually because they are keen to work with the employer, or don’t wish to jeopardise an offer of employment.
However, the restrictions implied by such terms such as Restricted Customer, Restricted Client, Restricted Area, Restricted Period, Confidentiality or Restricted Business can have a serious impact upon your future ability to work where you choose or with whom you choose after you’ve left your current job.
The purpose of restrictions in a contract of employment
They are added by employers to restrain you from working with their clients, working for a competitor, using their confidential information and setting up in competition with them for a limited period of time, following termination of your employment.
Typically the restraints apply for six months but can be for as much as a year or as little as three months, depending upon the contractual wording.
Do I need advice on the impact of restrictive covenants on my future employment?
Before accepting a new job offer or setting up your own business it is vital to obtain advice on the effect and enforceability of post-termination restrictions. We can often navigate a path between restrictions which are enforceable and those that are not which produces a realistic outcome for you.
Failure to take early advice is often a costly mistake which can lead to the loss of a job offer, the closure of a fledgeling business and considerable personal expense if the matter goes to court.
Furthermore, taking early legal advice can often allow you to take steps to mitigate or at least reduce risk when you take the plunge and issue your notice of resignation.
What restrictive covenants can feature in settlement agreements?
As well as employment contracts, restrictive covenants can often feature in settlement agreements, whereby your employer will ask you to reaffirm the restrictions which already apply to you (or they may even try to insert new ones at this late stage in the employment relationship).
Restrictive covenants tend to relate to ‘poaching’ and prevent you from taking the following with you when you leave:
Where you have access to particularly sensitive confidential information, restrictive covenants can also prevent you from working for a competitor for a period of time.
What if my employment contract doesn’t mention restrictive covenants?
Believe it or not, the common law position (that’s the position which would exist if your contract was completely silent about restrictive covenants), is that you are allowed to take clients, suppliers and colleagues with you. But this is not what large corporations would have you believe.
However, we live in a free-market economy whereby the individual is perfectly entitled to take business away from other companies because it’s argued that such a choice is good for the consumer.
During the course of your employment itself, you are prevented from doing the above activities by common law, which implies a ‘duty of loyalty’ into the employment contract, also known as a ‘duty of trust and confidence’.
Once the employment contract is over (ie. if you quit or are fired) then these duties fall away, and that is why any restrictive covenants will operate after the effective termination date (‘EDT’).
The restrictions must be proportionate in order to protect the legitimate business interests of the employer, and they cannot amount to a restraint of trade. In many cases, we advise that certain restrictions are not enforceable.
For example, requiring an investment banker to refrain from working in London for a period of six months post-termination would most likely be held to be unenforceable as a restraint of trade. The same would apply to a requirement that an employee doesn’t work for certain competitors if those competitors are the market leaders in the industry.
There are also helpful EU rules which cement the notion that anti-competitive practices should be very carefully considered prior to penalising anyone from offering more choice to the consumer. Restraint of trade itself is generally illegitimate.
When are restrictive covenants ‘too wide’?
Restrictive covenants which are too wide will tend to be viewed as unenforceable by the courts and tribunals. The definition of ‘too wide’ varies from case to case but here are a few pointers:
Industry-wide restrictions: any clause which seeks to prevent you from working in the same industry is highly likely to be unenforceable. Employers can only really get away with doing this for a few weeks and even then it would have to be localised to just a couple of postcodes. The exception to this rule could be if you are a very highly paid executive.
Length of time of restrictions: generally 3 to 6 months would be acceptable restrictions (assuming that the other criteria listed here are met) and anything over a year would be too much. Even a year would be quite a long time and may be unenforceable.
Your own contacts: companies often restrict you regarding people you have met whilst working for them. If, however, it was your own contact prior to working for them, then they can’t really restrict you from dealing with that person so easily.
Confidential information: this is generally retained by the company whether there is a restrictive covenant in the contract of employment or not. There are some grey areas, however.
For example, the contact numbers stored in your phone. Also if someone contacts you then you can’t be said to have used confidential information to get hold of them. Other examples of confidential information include:
- Lists of clients
- Prices lists
- Business plans.
What happens if you break a restrictive covenant?
Sometimes when employees, or teams of employees, leave their employer to join a competitor, set up in competition or start working with certain clients, the ex-employer doesn’t like it and attempts to take action to restrain the former employee.
If there are restrictive covenants in your contract of employment, the ex-employer may apply for a restrictive covenant High Court injunction.
This is scary stuff for you because you will receive a letter essentially threatening you to stand down, make full disclosures, pay costs and possibly an account of profits, failing which you will be sued, and all within a very swift time-frame.
If this happens to you then there is no time to waste: you need to contact a specialist employment law solicitor immediately because in the world of High Court injunctions, things happen very quickly. Your failure to act could escalate the situation very quickly as well as increase costs.
You need urgent legal advice as to whether to stand and fight or reach a negotiated settlement by giving undertakings and offering disclosure.
Very often, the sooner you act, the faster and less costly the process of resolution will be. Leave it more than a day and the consequences can be quite devastating.
Typical sequence of events after you break a restrictive covenant
Here is an example of a typical sequence of actions set out for you (actual timings may vary):
You leave your job and join a competitor or start your own business.
Your ex-employer writes to you and sets out how, in their opinion, you have breached the restrictive covenants in your contract of employment. This is normally by taking either clients, colleagues, or lists of data (see above).
You instruct solicitors to write to your employer. Often this has the effect of ending the matter because if you instructed us, we would point out the ways in which you are not in breach of your restrictive covenants and/or ways in which the restrictive covenant clauses themselves are drafted too vaguely or too widely so as to be unenforceable or not applicable. However, if this doesn’t work then the matter moves to the next stage.
You give ‘undertakings’ to the other side assuring that you won’t take any action with the alleged property (client lists etc) until an interim injunction hearing.
The interim injunction hearing takes place in the High Court. At this hearing, a judge will decide whether or not to impose restrictions on you pending the full hearing of the matter.
6 months later:
The full hearing takes place at the High Court. This will decide whether to release you from the restrictions imposed or to keep them. In practice, by this time the actual restrictions themselves will probably have worn off because they were only stated to last 6 months in the first place.
So a lot of the point of this hearing is to determine, with hindsight, who was right at the interim hearing 6 months previously. If you were right then your ex-employer will have to compensate you for the money you lost by having the restrictions placed on you. If you lose then you will now have to pay the (often excessive) legal fees of your opponent. Of course, if you win then they will have to pay your legal fees.
At any time:
Restrictive covenant injunctions cases can settle at any time during the above process. The negotiations themselves take place throughout the process, in the background, and are normally concluded by signing a settlement agreement document.
Monaco Solicitors are some of the most experienced employment lawyers in the U.K. when it comes to advising on restrictive covenant and confidential information injunctions and have been involved in some of the leading cases in this area of law.
We can give you advice and guidance to ensure that you can take the correct decisions and navigate through this difficult time in your life, so do get in touch to find out about the ways we can help and our related fees.