Restrictive Covenants In Employment Contracts: A Guide For Employers

Restrictive covenants (also known as ‘post-termination restrictions’) can be a valuable way of protecting your organisation when an employee leaves. When used correctly, they can help safeguard confidential information, customer relationships, supplier connections and workforce stability.

For example, a senior sales manager who leaves to join a competitor may have access to confidential pricing information and strong customer relationships. A non-solicitation clause could prevent them from approaching those customers for six months after leaving, while still allowing them to start their new role.

However, restrictive covenants are not automatically enforceable simply because they appear in an employment contract. In this article, we look at the main types of restrictive covenants in employment contracts and key principles employers should consider to enhance prospects of enforceability.

What is a restrictive covenant?

A restrictive covenant is a contractual clause that limits an employee’s activities after they leave, usually to prevent them from competing unfairly, misusing confidential information, or soliciting or dealing with customers, suppliers or colleagues.

What are the different types of restrictive covenants in employment contracts?

As identified, restrictive covenants centre around different post-termination restrictions. The most common types are:

1. Non-solicitation covenants

Non-solicitation covenants protect customer relationships and goodwill by preventing a former employee from actively approaching, persuading or encouraging customers, clients, suppliers or other business contacts to move their business elsewhere.

2. Non-dealing covenants

Non-dealing covenants provide stronger protection for customer relationships. They prevent a former employee from doing business with specified customers or clients, even if the customer approaches the employee first.

3. Non-compete covenants

Non-compete covenants prevent an employee from joining, working for, or setting up a competing business for a specified period after leaving. Because they are the most restrictive type of covenant, they are usually subject to the greatest scrutiny by the courts. For an example of a High Court case in which a non-compete covenant was found to be too wide, see our recent article.

4. Geographical restrictions

Geographical restrictions protect local goodwill and customer connections in location-dependent businesses. They restrict a former employee from carrying out certain activities within a defined geographical area, such as within a specified radius of the employer’s premises or customer base. They are useful for certain kinds of business with a local physical presence.

5. Non-poaching covenants

Non-poaching covenants protect the stability of the workforce. They prohibit former employees from recruiting, soliciting or encouraging colleagues to leave the employer and join another organisation. They are often used to prevent entire teams moving to a competitor.

6. Non-employment covenants

Non-employment covenants reduce the risk of losing key staff to a competitor. They prevent a former employee from employing or engaging certain former colleagues, whether or not they actively poached them. They are generally harder to enforce than non-poaching clauses because of their wider scope.  

Key considerations when using restrictive covenants in employment contracts

Restrictive covenants must satisfy the rules on restraint of trade. As a matter of public policy, any clause restricting an employee’s post-termination activities will be void unless the employer can show that it protects a legitimate business interest. Such clauses must also go no further than is reasonable, taking account of the interests of the parties and the public.

Employers should avoid relying on standard template clauses or applying the same restrictions to every employee regardless of their role. Instead, restrictions should be carefully tailored to the individual and the legitimate business interests that need protection. Courts are more likely to enforce narrowly drafted restrictions that are proportionate in duration, scope and geographical reach.

1. Protect legitimate business interests

The law does not allow employers to restrict a former employee solely to prevent competition. Instead, restrictions must be designed to protect a legitimate business interest.

Examples of legitimate interests include:

• Confidential information and trade secrets
• Customer and client relationships
• Supplier relationships
• The stability of the workforce

The level of protection required will depend on the employee’s role, their access to sensitive information and the influence they have over customers, clients or colleagues. Senior leaders and employees with significant customer relationships are more likely to justify stronger restrictions than employees in more junior roles.

2. Ensure restrictions are proportionate

Even where a legitimate business interest exists, any restriction must be no wider than reasonably necessary.

When deciding what is appropriate, employers should consider:

• The activities being restricted.
• The duration of the restriction.
• The geographical scope, where relevant.

A restriction that goes further than necessary is unlikely to be enforceable. For example, preventing an employee from working anywhere in a large geographical area for an extended period may be difficult to justify if a shorter period or smaller area would adequately protect the business. The key question is whether the restriction is proportionate to the specific risk posed by that employee’s departure.

3. Document restrictions properly

Restrictive covenants should be clearly drafted, expressly set out in writing and formally agreed by the employee, ideally within the employment contract. Clear documentation can significantly improve the prospects of a covenant being enforceable if a dispute arises.

4. Don’t overlook ‘consideration’

Something of value (known as ‘consideration’) must be given in return for the employee entering into the restrictive covenants. If restrictive covenants are included when employment begins, the employee’s salary, benefits and other contractual entitlements will usually provide the necessary consideration. If new restrictions are introduced later, such as following a promotion or role change, the employer will normally need to provide something of value in return, such as a pay increase, bonus opportunity or other contractual benefit.

5. Ensure garden leave clauses are included where necessary

An express garden leave clause is commonly included in employment contracts that contain restrictive covenants. It allows an employer to require an employee to spend all or part of their notice period at home while continuing to receive their usual salary and benefits. This can prevent the employee from joining a competitor immediately and reduce their access to confidential information during the notice period. The court can take the existence of the clause into account when determining the reasonableness of the restrictive covenant.

Getting the balance right with post-termination restrictions

Restrictive covenants can help protect confidential information, customer relationships and workforce stability after an employee leaves, but they are only likely to be enforceable if they are carefully drafted, proportionate and tailored to the risks of the role. Employers should review them regularly, particularly when employees are promoted, move roles or gain access to more sensitive information, and take advice where needed to ensure the restrictions remain reasonable and enforceable.