Most businesses will be familiar with restrictive covenants in employment contracts, particularly for senior employees and/or those in client or customer facing roles.
The aim of restrictive covenants is to protect an employer’s business interests (generally after an employee has left) by restricting the activities of a former employee. The types of restrictions can vary, but they typically relate to the former employee not:
- Competing with their former employer’s business.
- Dealing with and/or soliciting business from their former employer’s customers/clients.
- Trying to persuade other senior or key employees to leave (or employing them if they do).
- Misusing or disclosing their former employer’s confidential information.
A balance needs to be struck between the former employee’s right to earn a living, whilst ensuring that their former employer can still take steps to protect their “legitimate business interests”. Restrictions therefore need to be drafted with care and tailored to the circumstances of each employee to ensure that they are “reasonable” and therefore stand a better chance of being upheld by the Court.
With the exception of restrictions on the use or disclosure of confidential information, any restrictive covenants that limit a former employee’s ability to earn a living must be time limited. A very general rule of thumb is that a longer restriction is harder to justify but, ultimately, an appropriate period of time will vary from case to case.
Sometimes it can be tempting for employers to be too conservative in setting time limits for restrictions on the basis that they are concerned about enforceability. However, a decision of the High Court earlier this year is a useful reminder that a relatively long restriction can be enforceable.
In Law by Design Limited v Saira Ali, the High Court found that a 12-month non-compete clause in a solicitor’s employment contract was, in the circumstances of the case, a reasonable period for the protection of the former employer’s “legitimate business interests”. The period was “reasonably necessary” in light of the amount of time that it would take for a replacement employee to be found, recruited, trained and integrated into the former employer’s business. The Court found that the period of the restriction also reflected the “shelf life” of the former employer’s confidential information and the former employee’s ability to remember it.
Considerations for employers
Reducing the period of restrictions out of abundant caution without careful consideration of the circumstances and role of each employee may result in an employer “selling themself short” and the restrictions ultimately not providing adequate protection. Valid and enforceable restrictions might last for longer that you think and so it’s always wise to proper seek advice on the drafting of restrictions whenever any new employees are recruited.
It is also sensible to regularly review restrictive covenants to make sure they are up-to-date and remain reasonable and relevant. For example, what is suitable when an employee is first recruited might not be suitable a number of years down the line when their role and importance to the employer’s business has changed.
