Protecting the interests of a business is a top priority for any entrepreneur or company. However, with the dynamic nature of the job market and increasing competition, retaining top talent and safeguarding your business can become challenging.
This is where employee restrictions or restrictive covenants come into play. These agreements can effectively limit the potential damage a former employee can cause to a business.
In this article, we’ll dive into the basics of employee restrictions and explore the steps to negotiate fair and enforceable agreements that can protect your business from unwanted risks.
What is a restrictive covenant?
A restrictive covenant is a term to describe a clause placed in a contract of employment to restrict an employee from undertaking certain acts or activities for a specified period after their employment has terminated.
The contract will often list various restrictions on the employee, such as not poaching the employer’s clients/suppliers/staff, not joining a direct competitor, setting up their own business in competition, etc.
These restrictions are commonly described by reference to their effect, so for example, there are ‘non-poaching clauses’ and ‘non-compete clauses’, etc.
Are restrictive covenants enforceable?
For a restrictive covenant to be enforceable, it must satisfy the following tests:
- There must be a legitimate proprietary interest that the clause seeks to protect (such as, i.e. trade connections with customers and suppliers etc)
- The clause must be reasonable – in scope, geography (if applicable) and time duration
- It must go no further than is necessary to protect the legitimate proprietary interest
If it fails any of these tests, the covenant will be void in restraint of trade.
Restrictive covenants having the sole aim of preventing competition will not be upheld by the court. Also, shorter covenants are much preferred, as it can become very difficult to justify restrictive employee covenants beyond 3 to 6 months in duration other than in exceptional circumstances.
Why would employees accept restrictive covenants?
In recent times, restrictive covenants have become a key feature of employment contracts, particularly amongst senior employees and those actively involved in client-side work, such as sales and account management.
Many such employees are becoming aware that they will likely be asked to accept such clauses upon joining (or sometimes on promotion) to give their employer a degree of protection when they exit the business.
How do you go about negotiating them?
The key here is to ensure that the proposed clauses are fair and reasonable. This is in both parties’ interests.
As the employer, you will want the covenants to be deemed enforceable if tested. By limiting their scope and duration to make them enforceable, you will not over-burden the employee beyond what is strictly necessary.
Therefore, think carefully about the precise role of your employee, the nature of your business and the risks you are trying to mitigate. You will want to base the restrictions around the specifics of your particular situation.
For example, if you are involved in a very niche industry and are solely focussed on selling into the UK market, and your new hire is to be an Account Manager, there is little point in seeking to restrict their account management activities outside of that niche industry or outside of the UK market.
Likewise, think about your client base. If the vast majority of your sales are made to a select handful of long-established clients, with whom that Account Manager will be expected to foster close relationships, your primary interest as far as non-poaching is concerned should relate to those clients, as opposed to long-since-forgotten prospective leads from years before.
A good negotiating tip is to explain the reasoning behind the clauses and why they are needed. If the employee is told the background and context from your perspective, they are more likely to understand the situation and agree to the terms.
Well-drafted, well-negotiated clauses are far better than standard template-style provisions that may not withstand judicial scrutiny should the time come.
In conclusion, negotiating fair and enforceable employee restrictions is crucial for protecting your business in the competitive business world.
By ensuring that the restrictions are tailored to your specific business needs, you can strike a balance between protecting your interests and not overburdening your employees. The key is to understand the precise role of the employee, the nature of your business, and the risks you are trying to mitigate.
By engaging in open and transparent negotiations and seeking the advice of an experienced employment lawyer, you can draft fair, reasonable, and enforceable restrictions.
Ultimately, this will ensure that you can attract and retain top talent while safeguarding your business’s future growth and success.
About the author
Ashley Gurr is one of the hundreds of commercial and employment contract lawyers at LawBite. Ashley has over 15 years of experience in private practice helping SMEs and in-house for an international consultancy group advising on commercial contracts and a multi-national utility giant in a contract strategy role.
LawBite has years of experience and a team of expert lawyers who have provided countless companies with affordable employment legal advice and professional guidance on drafting employee contracts. Our team of legal professionals have the knowledge and insight to ensure your contracts protect your interests, giving you the peace of mind you need when it comes to managing your employees.