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Restrictive covenants - What’s the current thinking?
November 2008
A survey of employment lawyers showed that 46% believe that restrictive covenants are no longer appropriate or effective. So can they still be useful, and if so, what pitfalls should you watch out for?
Protecting your business
As you know, restrictive covenants are often used to prevent ex-employees from passing on sensitive business information to the highest bidder following their departure from your business. Yet whilst their use is a legitimate business objective, the courts have increasingly taken a firm line with any employer using them inappropriately or over zealously. So just how far can you now go so as to make their continued use worthwhile?
Weaknesses of restrictive covenants
Whilst proponents of restrictive covenants argue that they provide valuable protection for those with legitimate business interests to safeguard, the fact that the courts take a very tough line on their validity remains their major shortcoming. This is because they are generally seen as unlawful restraints of trade. So if a court interprets one as being too widely drawn in that it goes furthe3r than is necessary, the entire clause will be struck out.
A pessimistic view
This pitfall has prompted some lawyers to question whether restrictive covenants still have a place in employment contracts. In fact, research carried out by the lawyers’ magazine “Legal Week” in August 2007 found that 46% of those surveyed believed that they are no longer appropriate or effective, with only 14% actively believing that they are. Whilst this research relates to their use in law firms, these findings are equally applicable to any workplace. Yet a 2007 Court of Appeal case shows that where it can be shown that the reasons are legitimate, a non-competition clause lasting twelve months can still be valid. (Thomas v Farr plc and Hanover Park Commercial Ltd 2007)
Avoiding the pitfalls
These points show that restrictive covenants still have a place in the workplace providing their use and coverage can be justified. You can do this by working through the following steps:
Step 1. Are covenants necessary? First you must justify the use of restrictive covenants within your business. So identify something tangible that needs protecting e.g. information on a new product that you are developing.
Step 2. Coverage. Look at what’s legitimately required to protect your business and go no further. So err on the side of caution and remember that you must always be able to justify your decision on what’s covered and why.
Step 3. Who’s affected? Identify individual employees that need to be included and don’t be afraid to apply different conditions or periods for the operation of the restrictive covenant, e.g. based on seniority and job role of the employee.
Tip. Pay particular care when considering the geographic scope and duration of any covenant that seeks to restrict future employment opportunities- anything more than six months will be difficult to enforce. Plus, do not include junior staff unless you can show that it’s justified. Doing otherwise weakens your position immediately.
Restrictive covenants can still be useful as long as they go no further than is really necessary. So consider what assets needs protecting and why, and which employees should be subject to them. Don’t worry about applying different terms to different types of staff.
Source: Tips & Advice from Indicator 16 October 2008
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