Overview of Restrictive Covenant in Employment Contracts
Restrictive covenants, also known as negative covenants, are terms or conditions included in an employment contract that can limit an employee’s ability to work (unlike positive covenants) in the same industry or with competitors for a certain period after leaving their job.
For example, a non-compete clause of a restrictive covenant prohibits an ex-employee from working for a competitor or starting a competing business for a certain period after leaving their current job.
- Overview of Restrictive Covenant in Employment Contracts
- Types of Restrictive Covenants
- Enforceability of Restrictive Covenants
- What Happens if You Violate Restrictive Covenants?
- What if the Employer Takes No Action Following a Breach?
- How Do They Calculate the Compensation Value Employers Are Entitled to After a Breach?
- Restrictive Covenants When Leaving a Job
- How Can IAS Help?
- Frequently Asked Questions
Types of Restrictive Covenants
Several types of restrictive covenants can be used in employment agreements.
1. Non-competition Covenants
A non-competition covenant is a type of restrictive covenant that prohibits a former employee from working in similar employment for a competitor, often within a particular geographic area for a specified period.
These are considered the most restrictive type of covenants. The purpose of such clauses is to protect a legitimate business interest such as client connections, confidential information or a stable workforce.
2. Non-solicitation Covenants
It is a type of restrictive covenant that prohibits a former employee from soliciting the former employer’s current, prior or prospective clients for a specified time.
The purpose of a non-solicitation clause is to protect the employer’s customer relationships and goodwill.
3. Non-dealing Covenants
A restrictive covenant of this type prevents a former employee from dealing with former clients/customers/suppliers of the former employer, regardless of which party approached the other.
This means that even if a former client/customer/supplier initiates contact with the former employee, the employee is still prohibited from dealing with them.
4. Non-poaching Covenants
A non-poaching covenant is a rule in some employment agreements that stops ex-employees from asking their former employees to work for a competitor. The idea is to keep the employer’s workers safe and prevent them from leaving to work for someone else.
5. Confidentiality Agreements
A confidentiality agreement is a restrictive covenant that prevents former employees from disclosing or using their former employer’s proprietary or confidential information (such as trade secrets) or that of their employer’s customers.
The information doesn’t have to be a “trade secret” to be protected. It just has to be simply confidential and not available to the public. Confidentiality agreements can be standalone agreements or can be included as part of an employment agreement.
Enforceability of Restrictive Covenants
The enforceability of restrictive covenants will depend on various factors, such as the employee’s position in the company and the type of restriction being imposed.
The following are the key points in understanding the enforceability of restrictive covenants in an employment agreement.
- They are viable only for a limited time – usually 3,6, 9, or 12 months.
- Restrictions cannot be too broad. If the restriction is not reasonable, it will be unenforceable by the court.
- The court will not enforce the clause if it denies ex-employees the right to earn a living.
- It will not be enforceable if the covenant prevents all contact with relevant business contacts.
- Senior employees who regularly interact with customers and contacts are more likely to have an enforceable restrictive covenant than junior employees.
- The agreement of both parties to the covenant does not guarantee enforceability.
- These clauses are usually not enforceable unless the employer can prove they are necessary to protect their legitimate business interests, such as customer connections, confidential information, or supplier connections.
For example, a non-compete clause may be difficult to enforce if a non-solicitation or non-dealing clause would achieve the same goal.
- An employer cannot typically prevent former employees from competing with them. However, if an employer can prove to a judge that the covenant is necessary to protect their legitimate business interests and is not overly restrictive, it may be upheld and enforced.
What Happens if You Violate Restrictive Covenants?
The consequences of breaching restrictive covenants are not automatically applied. It is typically up to the party that is entitled to enforce the covenant to take legal action against the breaching party.
The consequences of breaching can include injunctions, damages, or both. An injunction is a court order that requires the employee to stop a specific action or behaviour.
Damages refer to the monetary compensation awarded to an employer who has suffered harm or loss due to a breach of contract. The purpose of awarding damages is to restore the former employer to the position they would have been in had the breach not occurred.
Damages are typically paid by employees who breached the agreement or contract and caused harm to the former employer. The consequences that may apply in a given situation will depend on the specific language of the covenant and the applicable laws in the jurisdiction where the covenant was created.
To learn more about how we can help you understand restrictive covenants, please contact IAS at 0333 305 9375 or through our website to schedule a consultation today.
What if the Employer Takes No Action Following a Breach?
If an employer takes no action when you breach a negative covenant, it does not necessarily mean that you are free from consequences. The terms of the contract remain in effect and your employer can choose to take legal action against you at any time within the time specified on the contract – even if they have not done so immediately.
Depending on the nature of the breach, your employer may be entitled to seek damages, injunctive relief or other legal remedies. The specific consequences will depend on the terms of your contract and the laws in your jurisdiction.
How Do They Calculate the Compensation Value Employers Are Entitled to After a Breach?
The compensation calculation for a breach depends on various factors, such as the nature and extent of the breach, the type of restriction involved, and the impact of the breach on the employer’s business.
Generally, the compensation amount is determined by calculating the financial loss suffered by the employer due to the breach. This can include the loss of clients or customers, revenue and profits. The compensation amount may also include any expenses incurred by the employer to enforce the restrictive covenants.
Sometimes, the compensation amount may be calculated based on a percentage of the employee’s salary or remuneration. This is particularly true if the restrictive covenant contains a liquidated damages clause specifying a predetermined compensation amount in case of a breach.
Review the Terms of the Restrictive Covenants
Before taking any action, review the terms carefully. Ensure you understand what actions are prohibited and what you are permitted to take. Seek legal advice if necessary to fully understand your rights and obligations.
Address and Negotiate Restrictive covenants
When negotiating restrictive covenants, it is important to be clear about your objectives and to seek legal advice if necessary. Consider negotiating for a more limited or specific restriction, such as a restriction on soliciting your former employer’s clients rather than a blanket prohibition on competing.
You can also negotiate for a shorter duration of the covenant or for financial compensation in exchange for agreeing. It is important to approach the negotiation constructively and professionally and be prepared to compromise where appropriate.
Consider negotiating with your former employer: If you believe the restrictive covenant is unreasonable or unfair, you may wish to negotiate with your former employer to have the covenant removed or modified. This may involve demonstrating that the covenant is not necessary to protect the employer’s legitimate business interests or that it is unduly restrictive on your ability to earn a living.
Ensure Compliance With Restrictive Covenants
To ensure compliance with restrictive covenants, it is important to review the covenant’s terms carefully and get legal advice if necessary. You should be clear about what is prohibited under the covenant and what actions you are permitted to take.
It is important to avoid any actions that may be seen as a breach of the covenant, as this may result in legal action being taken against you. You may also consider implementing internal policies and procedures to ensure that you and your employees are aware of and comply with any restrictive covenants that apply to your business.
How Can IAS Help?
If you are unsure about how to comply with the terms of the restrictive covenants, or if you are concerned about the impact of the covenant on your ability to work, seek legal advice. At IAS, we understand how important it is for you to avail better career opportunities for yourself.
If you are considering knowing more about your options in your employment contract, we can help. Our qualified and experienced legal professional can help you understand your rights and obligations and advise you on the best course of action.
Having IAS on your side assures you that your matter will be handled professionally and efficiently, increasing your chances of success.
To learn more about how we can help you with restrictive covenants, please contact us at 0333 305 9375 or through our website to schedule a consultation today.
Last modified on May 10th, 2023 at 1:02 pm
Need help with an immigration issue? Book a one-to-one advice session with one of our legal caseworkers.
We can complete your visa application on your behalf, taking the stress and hassle out of the process.
Fast Track Package
Need to submit an application quickly? We can help you complete and send it off in as little as 24 hours.
Ensure you have the greatest chance of a successful appeal with our legal support and guidance.
The Advice Package
With our Advice Package, you can book a one-to-one session with one of our legal team and receive bespoke advice tailored for your situation. We will review your case and give you expert advice on how best to proceed with your immigration matter. Reach out to a member of our team and book your session today.
The Application Package
Our Application Package is designed to help relieve the stress of immigration applications. One of our legal caseworkers will help you throughout the entire process, including establishing your eligibility for your chosen route, completing your application form to the highest standards and organising your documents. We will then submit it and monitor its status on your behalf.
The Fast Track Package
Our premium Fast Track Package is ideal if you need to submit an application quickly, such as if you need to meet a tight deadline. Our lawyers will work closely with you to see that your application is completed to the highest standards and ensure you get your application in on time, helping to take the stress and pressure off you.
The Appeal Package
Visa appeals can be a stressful process, especially if you’re relying on a specific visa to be approved. Our legal team can help you navigate the whole process and maximise your chances of a successful appeal, working alongside you to reach a favourable result. We can also represent you in immigration-related hearings and tribunals.
Any modification or renegotiation would need to be agreed upon by both parties and may require consideration, such as additional compensation or benefits. Furthermore, some restrictive covenants may contain, in particular circumstances, explicit clauses that prohibit modification or renegotiation
Such covenants are typically enforced through legal action. If an employer believes an employee has breached a covenant, they may file a lawsuit or application seeking to implement the covenant. The local government or court then has the authority to enforce the covenant and may impose penalties on the employee if they are found to have breached the terms of the covenant.
Sometimes, the employer may need to provide evidence to demonstrate that the covenant is necessary to protect their legitimate business interests. The judge also considers whether the covenant is reasonable and fair in the circumstances.
Alternative dispute resolution methods, such as mediation and arbitration, can resolve disputes relating to restrictive covenants. These methods are often quicker and less costly than pursuing legal action through the courts.
Mediation involves a neutral third party who assists the parties in negotiating a resolution, while arbitration involves a third party who makes a binding decision. Direct negotiation or seeking the assistance of a neutral third party can also be useful.