6th May 2016

The Rare Occasion When Minimum Effort is Encouraged – Restrictive Covenants

There are not many situations in law where the minimal intervention is encouraged. In fact most lawyers like to intervene as much as possible! This is not the same for restrictive covenants.

The law
Restrictive covenants can be a useful means of protecting the interests of your business when an employee leaves the company. They can be used to restrict a departing employee from taking customers or clients to their new business; they can be used to prevent a departing employee from taking any other members of staff with them; they can also be used to prevent a departing employee from sharing any trade secrets and other confidential information.

Despite the benefits to a business, the law must balance these benefits against any unnecessary restraints on trade. To ensure that there are as few trade restraints as possible, the law requires that any restrictive covenant should have “minimal intervention to protect a legitimate business interest”.

Legitimate business interest
Preventing competition is not, of itself, sufficient to amount to a legitimate business interest for these purposes. Essentially, the employer must show that there is some aspect of its business that amounts to the employer’s property and that it is therefore entitled to protect. The employer needs to be specific, for example a legitimate business interest could be to protect trade secrets and/or confidential information; or protect trade connections with customers and suppliers; or to protect the stability of the employer’s workforce.

Minimal intervention
This means that a restrictive covenant can only impose the least restrictive restraint possible to protect a legitimate business aim. If a restrictive covenant is found by a court not to be the minimum restriction possible, then the whole restriction will be deemed to be unenforceable. The courts will not amend the restriction to what it believes would be the minimal intervention nor to what was intended by the business. There is therefore a high risk that if a restrictive covenant is deemed to be too overbearing, that it will not have any power at all. You, as an employer, will want to make sure you judge it correctly.

In keeping with the minimal intervention ideology, a restrictive covenant cannot be indefinite either geographically or in time. The nature of the business will decide how reasonable any geographic restraints are. If the company is an international company and the employee has been involved with customers or clients internationally, then an international restraint may be held to be reasonable. Similarly, the nature of the business will determine how reasonable the period is that restriction is due to last. We would be hesitant to include any period longer than 12 months unless you have a good business reason to do so.

Time of signing
Another point to consider when drafting restrictive covenants is that their reasonableness is interpreted as it was at the time of signing ie if it was unreasonable at the time the employee signed the contract, it will be held to be unreasonable now. A business cannot argue that a junior employee, starting their career, is a risk to the business in terms of taking clients or customers with them if they left the business. Imposing a restrictive covenant with these terms would not be a minimal intervention. An employee is likely to grow within a company and eventually make contact with more and more clients or customers. As the employee’s contacts grow, and they are more likely to affect a legitimate business aim if leaving the business, then a restrictive covenant becomes more appropriate.

Our advice would be, if restrictive covenants are required in your business, then they should be reviewed each time an employee is promoted. The covenant should grow with the employee’s career and influence. If you include the same restrictive covenant for every member of staff, it is likely a number of the covenants will be unenforceable. The last thing you want is to think that you are protected, only to find out the clause is unenforceable because it is too restrictive. As I say, there is a high risk that if you are over-zealous with the restrictions, then you will end up with no restrictions at all! This is a very complicated area of law that causes a great deal of anxiety for employers both losing and hiring staff. If you are in any doubt at all, be sure to seek advice!

Andrew Wallace
Solicitor – Employment Law



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