Restrictive Covenants 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.

Page Contents

• 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

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.

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.

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.

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.

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.