5 Restrictive Covenant Issues Employees Should Know

Has your employer put covenants in your contract that do not cover legitimate business interests?

A restrictive covenant is usually a form of restraint of trade to limit an employer after they have left the business in order to protect the business. To be enforceable, an employer must be able to demonstrate that the covenant is protecting a legitimate business interest.

For example, a non-competition covenant may be the only practical way to safeguard confidential information. To enforce the covenant, an employer will need to be able to distinguish between information that is company property and the employee’s own skill set, experience, and knowledge.

Your employment contract will specify the legitimate interests that the company is seeking to protect in the preface to the covenants. If your employer states a different reason for seeking to protect the covenants later that they do not include in the preface, it may not be legally enforceable.

Are the covenants in your contract wider than is reasonably necessary?

Your employer will need to show that the restrictive covenant only covers what is reasonably necessary to protect the business’s interests once you leave your employment.

General factors that the courts will likely take into consideration when deeming reasonableness include:

• the factual position at the time the contract was made.
• the employee’s status.
• the nature of the market and the employer’s business.
• any industry standards for restrictive covenants.
• the duration of the covenant.
• the geographical extent of the covenant.
• the harm caused by enforcing the covenant.

As an employee, your case will be assessed individually, and it is up to your employer to show that the restrictive covenant is necessary.

In a recent High Court Decision, a 12-month no-complete cause was deemed unenforceable because the employment covenant was considered too wide, covering both direct and indirect competition. The covenant also covered competition with parts of the employer’s business that the employee had little to no involvement with. The employer sought to argue it would not enforce the wider shareholders’ agreement covenant in respect of competitors outside the area of the business in which the employee worked. However, the court stated that a later proposal to not enforce an area of the covenant cannot save a covenant that is drawn too wide.

If your restrictive covenant covers areas that do not apply to your employment, it may not be enforceable, and you should seek legal advice.

Has your employer enforced new covenants later in your employment?

Most employers will make sure the restrictive covenant is part of your contract from the start of your employment. Adding a covenant further down the line can be hard to do correctly and may result in being unenforceable.

If your employer is attempting to enforce a new restrictive covenant or amend an existing one after your employment has started, they will need your consent to do so. If you do not give your employer consent for the restrictive covenant they can:

• Unilaterally impose the change
  If your employer forces the change without your consent, you may have a claim for constructive dismissal. It should be made aware that it is possible for you to give implied consent if you don’t explicitly object to the change. Therefore, if you do not wish to sign, you must explicitly tell your employer you do not agree with the changes and therefore will not sign.
• Terminate your employment and offer re-engagement on new terms
  If your employer terminates your employment and offers re-engagement on new terms you may have a claim for unfair dismissal.

For an introduced covenant to be legally binding the employer will need to provide “consideration” to you agreeing to the new covenant. This could be a pay rise, bonus, or another form of payment. In some court cases, the court has deemed that offering continued employment to the employee, is enough evidence of “consideration”.

The English courts have declined to enforce new covenants that were introduced later in the employment relationship where valid consideration is not given for the change.  If you are facing a new covenant that you do not wish to sign, our employment solicitors can help you with the next steps before any actions are taken.

Have you been promoted and not had to sign a new restrictive covenant?

When the court assesses whether a restrictive covenant is reasonable, they will investigate when the covenants were entered into and the role of the employee at the time. To be enforceable, you will need to sign a new restrictive covenant when your job role changes within the company.

How to know if the restrictive covenants in your employment contract are reasonable?

Restrictive covenants are a complex area of employment law. Therefore, it can be hard to know exactly if the covenant your employer has drafted is reasonable. When considering the restrictive covenant in your employment contract, there are some factors to consider:

• Is the restrictive covenant too restrictive?
  There are several factors the court will assess when determining if a covenant is too restrictive. Examples are:

• • the length of the restrictive covenant
  • the geographic coverage
  • areas of business within the covenant to see if it truly was created to protect the business
  • whether the restrictive covenant prevents you from earning a living by being too wide in its impact.
• Does the covenant protect the legitimate interests of the business?
  When it comes to proving that the restrictive covenant protects the legitimate interest of the business, the burden falls on the employer to provide proof.

• Does the restrictive covenant apply to your job role?
  It’s important to look at your seniority and department in the business. This way you can determine if the restrictive covenant applies to your role in the business. For example, some senior roles can come with more access to client data. Therefore a restrictive covenant may be more necessary to protect the business. Any change to your role in the company should include a review of any covenants. As a result, an employer can assess if the covenants are still relevant to the role.