Restrictive Covenants

• Northern Ireland

19-01-2023

We continue to be faced with a challenging labour market as the competition for key employees continues. It began with the ‘Great Resignation’ and has now moved into one of the most competitive job markets many of us have seen in a number of years.

Increased movement in the labour market presents two key considerations for employers. Firstly, how do we attract (and keep) the right talent and secondly, how do we protect our business from the knock on effects of employee movement.

Restrictive covenants can be a very useful tool to help slow the movement of employees between one organisation and another. When used appropriately, they can help prevent the interests of a business from being negatively impacted by an employee’s move to a competitor. Restrictive covenants can take a number of different forms, such as non-compete, non-solicitation, non-dealing and non-poaching. The aim of a restrictive covenant is to protect the Company’s legitimate business interests and therefore should be drafted with care and consideration to ensure they are proportionate and effective. It is important that companies do not impose, for example, a six month restrictive period when two months would have sufficed, as they risk a court striking down the restrictive clause in its entirety as unreasonable.

Legitimate interest

In order to ensure restrictive covenants are enforceable, there must be a clear legitimate interest which the business is seeking to protect. Companies should actively consider why they are using restrictive covenants – does the employee work in sales and there is a risk of them moving to a direct competitor? Will the employee have access to sensitive business information which could cause damage to the business if shared with competitors? Companies must be able to articulate what it is they are trying to protect and why. If Companies are not able to do this, then they will not be able to enforce the covenants against the departing employee, leaving the Company’s interests potentially at risk.

Reasonable protection

Once you have established there is a legitimate interest to protect, the steps the Company takes to protect that interest must only go as far as is reasonable to protect that interest. This is a careful balancing exercise between protecting a Company’s legitimate interests and curtailing an individual’s ability to work. As an example, let’s say you have identified confidential pricing information as a legitimate interest to protect. Any restrictions should only be applied to those employees who have access to the confidential pricing information. It would not be reasonable to subject every employee to a 12 month restriction in order to protect that information as not every employee will have access to the information nor could it be of any potential use to them in future employment. Equally, if the Company’s pricing information is subject to change every six months, then a 12 month restriction is excessive as the knowledge the departing employee will hold will be outdated within six months.

A review of restrictive covenants should not be kept just for new joiners. As all employers know, your most valuable asset is your employees, especially those who have grown and progressed within your organisation. As an employee climbs the ranks, their restrictive covenants should be reviewed with each promotion to ensure they are in line with their new position and level of seniority. You do not want to be left with a situation where your most senior longstanding employees are subject to a short notice period and 1 month restrictive covenant as they remain on the original terms and conditions which were offered when they joined the Company.

Companies should also consider whether the departing employee who is subject to the restrictive covenants is the only person within their organisation carrying out work of that particular kind. If that employee leaves, and is not replaced, the business will no longer be carrying out work of that particular kind, meaning if the departing employee is subject to restrictive covenants which prevent the employee from competing with any trade or business in which the Company has been actively involved, the Company will not be able to enforce these as they are no longer actively involved or engaged in the particular work or trade in question (Phoenix Partners Group LLP v Asoyag [2010] EWHC 846 (QB), Threlfall v ECD Insight Ltd and another [2012] EWHC 3543 (QB)). Of course, these sorts of scenarios are fact specific, but it is important to have these points in mind when considering who to recruit and when.

You might also wish to consider whether the employee’s notice provisions are sufficiently long. A short notice period can undermine a lengthy restrictive covenant as it can be viewed as evidence the employee is not essential to the business and can be replaced quickly and easily.

How to navigate restrictive covenants when recruiting

A question asked by all recruiters of interviewees is “how long is your notice period” but what is more frequently not asked is “are you under any restrictive covenants”. Having restrictive covenants at the forefront of your mind when recruiting will often save difficulty, and expense, further down the road. It is important to understand what type of restrictive covenants a prospective employee might be subject to and how they might impact your business. For example, is a prospective employee subject to a non-solicitation clause, which would prevent them approaching customers of their previous employer for a set period of time, as opposed to a non-dealing clause which would prevent them from dealing with customers of their former employer for a period of time even if the customer approached the employee without solicitation.

If you are recruiting an employee who is subject to restrictive covenants, you should carefully consider the area of the business they are being recruited into and how this fits with their restrictive covenants. Can the employee be placed into a different area of the business until the restrictive covenants have ended? Can the employee offer undertakings to their former employer not to breach the restrictive covenants they are under?

As with all threatened litigation, it is important to engage with the other parties at an early stage to ‘take the heat’ out of any threatened actions and avoid litigation entirely if at all possible.

Breaches of restrictive covenants

If a business critical person resigns, or there is an indication they may resign and they perform a role where legitimate business interests may be at risk, an employer should take steps in readiness. This may be achieved by placing the employee on garden leave for the duration of their notice period, or it may involve seeking immediate injunctive relief from the courts to protect the business. If the Company does need immediate relief, you need to move quickly and seek legal advice on the options available, whilst gathering evidence of the breach (or potential breach) and any damages which may have been suffered. Perhaps most importantly, the Company must ensure its confidential information is secured and the departing employee no longer has access to it.

Key takeaways

Consideration of the particular context in which the business is operating is key in showing a business has acted reasonably both when imposing restrictive covenants on new employees and when recruiting employees into the business who are subject to restrictive covenants. Be clear on what the legitimate business interest is you are trying to protect and ensure you go no further than reasonably necessary to protect that interest.

If you would like more tailored advice on restrictive covenants and their enforceability, please contact;

• Matthew Howse
• Partner
• +44 28 9526 2040
• +44 28 9526 2040

• Laura McManus
• Associate
• +44 28 95262021
• +44 28 95262021

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