The term restrictive covenant in employment law generally refers to a clause in the employment contract that seeks to restrict the employee’s business activities once their employment comes to an end. Restrictive covenants are also used within agreements for business sales, mergers and acquisitionsM&A: in company law, an abbreviation for mergers and acq....
Restrictive Covenants in employment contracts
Employer companies often seek to protect their business interests by having their employees, workers or consultants sign agreements that seek to impose restrictive covenants on the individual. Those covenants, if enforceable, will restrict the business activities an employee can be involved in following their resignation.
Restrictive covenants only protect the business for a limited period of time and should be expressly included in employees’ contracts or service agreements.
Covenants can prevent employees with highly valued skills from working for competitors when they decide to end their employment with a company. For employers, although you must protect your business interests, you cannot impose unreasonable restrictions on your former employees.
For the individual, it is important to note that restrictive covenants within a contract should not always be taken at face value. If a court finds that a post-termination restriction goes further than is reasonably necessary to protect a company’s legitimate business interests, that restriction will be ruled an unlawful restraint of trade and thus unenforceable.
Our restrictive covenant solicitors, Manchester, have considerable experience fighting the employee’s corner and successfully challenging the heavy-handed tactics of large companies attempting to enforce unreasonably wide restrictive covenants.
A restrictive covenant may be enforced if the ex-employer can convince the Court that the covenant:
- protects the legitimate interests of the business
- is reasonable and necessary to protect the interests of the business
Restrictive covenants in business sales
Restrictive covenant disputes can also arise in the context of mergers and acquisitions or agreements for the sale and purchase of business assets. It will be common for the vendor of the shares or business assets to give restrictive covenants. This also includes any undertakings not to solicit customers of the business or compete with it following completion of the transaction.
Agreements for business sales can include a range of restrictive covenants, including:
- Non-solicitation of staff
- Non-solicitation of customers or suppliers
- Reputation and goodwill covenants
- Geographic locations
Restrictive covenants in business sales, mergers, and acquisitions must be reasonable and genuinely necessary for protecting the business.
In such cases, courts can more readily find that the relevant restraint of trade clauses are reasonable and enforceable, particularly where the vendor has sold the shares or business assets for a large sum.
What restrictions are imposed in UK employment contracts?
Our restrictive covenant and employment law solicitors regularly advise both companies and individuals on restraint of trade and confidential information issues arising out of service contracts, consultancy agreements and contracts of employment.
There are a number of restrictions that may be imposed within a covenant. Some of the restrictions most commonly imposed are:
- Prohibiting the use or disclosure of the company’s confidential information.
- Prohibiting the use by the individual of a trading name that is deceptively similar to the companies.
- Prohibiting the individual from dealing with, or soliciting business from, the company’s clients and customers (commonly known as “non-dealing clauses” and “non-solicitation clauses”).
- Prohibiting the individual from being involved in business activities that compete with those of the company (aka “non-competition clauses”).
If an employee already has post-termination restrictions in their contract and they do not believe that they are reasonable, they can ask their employer to agree in writing to waive the PTRs. Employees typically request this when negotiating their exit from their company, especially if the company is offering them a settlement agreement.
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Companies seeking to protect their business interests can commence court proceedings where restrictive covenants have been breached. The parties who have benefit of the covenant, if they are successful, can expect to obtain an injunction. This can restrain the individual from committing further breaches, as well as financial compensation, which can take the form of either:
- Damages, that is, the damages that have flowed from the breach, such as lost future earnings where a customer has been enticed away by an ex-employee; or
- An account of profits is when the ex-employee will be ordered to account to the company by paying over a sum equal to the profits generated as a result of breaching the restraint of trade clause.
How can South Bank Legal help?
The enforceability of restrictive covenants can be complex and usually requires specialist legal advice and assistance. Our commercial litigation solicitors in Manchester frequently act in cases where there is a dispute regarding a restrictive covenant.
Our employment lawyers provide timely and cost-effective legal services and representation to our clients. We represent clients in the UK and abroad across a range of industries.
If you require advice on a restrictive covenant or restraint of trade clause, contact us online today for a confidential discussion. We also provide legal services for a variety of other disputes, including commercial property disputes, shareholder disputes and professional negligence.
South Bank Legal Solicitors is a commercial law firm, with offices based in London,. We are authorised and regulated by the Solicitor’s Regulation Authority (SRA).
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