Restrictive Covenants in Employment
Thank you for your deep and expert analysis and professional advice” - Dr K L, Hampshire
The starting point is that post-termination covenants in employment contracts restricting the freedom of an ex-employee are in restraint of trade and void for illegality. However covenants will be enforceable if the employer can show that the covenants:
- Are designed to protect his legitimate interests;
- Extend no further than is reasonably necessary to protect those interests.
An employer is not entitled to protect himself against competition in itself, but only against unfair exploitation of his:
- Confidential information or trade secrets.
- Customer connections; and
- Workforce where entitlement might cause instability.
An employer’s claim for protection must be based upon the identification of some advantage or assets inherent in the business which can be regarded as its property and which it would be unjust to allow the employee to appropriate for his own purpose.
The reasonableness of the restriction is judged at the date the contract was made, based upon the anticipation of the parties at that time.
In broad terms there are four types of restrictive covenant with which employers seek to protect their interests after an employee has left:
- Restriction on disclosure of trade secrets or confidential information.
- Restriction on soliciting or dealing with customers and, sometimes, potential customers who have been negotiating with the employer but not yet entered into a contract.
- Restriction on enticing away employees from the employer.
- Restriction on competition within a certain area (‘area covenants’).
A covenant is either valid or it is not. The Court is not entitled to re-write an unreasonable covenant to render it reasonable.
Whether a covenant is reasonable is a question of law that is decided by reference to the facts in any given case. Other decided cases are of limited relevance.
In defining these principles, the first task facing a Court is to consider the covenants in order to determine what exactly they mean. The second is to consider whether the employer has shown he has a legitimate interest requiring protection and to define as precisely as possible what the interest is. Would a less far reaching covenant have been adequate to protect the employer?