RESTRICTIVE COVENANTS: WHAT ARE THEY AND WHY DO YOU NEED THEM?

When an employee leaves, they are in a position to profit from your confidential information, either by divulging secrets to others or taking what they know and putting it into practice themselves. Restrictive covenants can stop this from happening.

What are restrictive covenants?

Restrictive covenants are restraints written into an employment contract that trigger as soon as a person leaves your company. They are designed to prevent a departing employee from going to work for a competitor or starting their own business in the same industry and using your information. 

In the digital sector, where everything you have is built on innovation and creativity, putting a clause in place to protect your assets is essential.

Types of restrictive covenants

The standard types of restrictive covenants that you can use in employment contracts are:

  • Non-competition – restricting a former employee from working for a competitor.
  • Non-solicitation – restricting a former employee from poaching your clients, customers and suppliers.
  • Non-dealing – preventing a former employee from dealing with your previous clients, customers and suppliers.
  • Non-poaching – preventing a former employee from poaching current employees.

Do you need restrictive covenants?

The UK’s digital sector is growing substantially – it currently employs 1.1 million people and was worth £184 billion to the UK in 2018. The sector is growing at a faster rate than the economy, which has led to greater competition.

Employers in the digital sector say that finding talented individuals is their most common challenge, headhunting employees from rival companies is rife — not only for their skills, but their insider knowledge. 

No matter how trustworthy your employees are, given what is at stake, it is too much of a risk not to have restrictive covenants in place.

When are restrictive covenants enforceable?

Restrictive covenants can be enforced for a period of time after an employee’s employment has ended. 

However, a restrictive covenant can only be enforced if it protects a legitimate business interest. These interests are:

  • Trade connections, including customers and their relationship to employees.
  • Confidential information.
  • Trade secrets.

If a restriction does not fall in line with these interests it can be seen as being an unlawful restraint on trade. 

Restrictive covenants must also be limited in time and geographical area (if appropriate). Typically, the time period is 6 months, or 12 months for more senior employees.

For example, a 12-month non-competition clause in the employment contract of a junior copywriter could be seen as excessive, but the same clause for a creative director would not. A creative director will have more access to sensitive information and trade secrets, which would make them moving to a rival company more of a risk.

How to make restrictive covenants work for your business

To convince a court that the restrictions are fair and enforceable, the right wording is critical. Therefore, you should have restrictive covenants drafted by legal professional rather than relying on a template you find on the internet.

Restrictive covenants must precisely describe the employee’s role, accurately reflect the business circumstances and go no further than necessary based on the employee’s role within the company.

Simply having restrictive covenants in your employment contracts does not make them enforceable and opting for a one-size-fits-all approach will almost certainly see them thrown out in court.

If you would like more information on restrictive covenants and how you implement them in your business, email us at hello@rinewlegal.co.uk