Restrictive covenants on employment contracts
Following a recent case, employers who require employees to sign a contract that restricts theiractivities after termination must make sure its terms are accurately drafted and well thought through.
Employers use restrictive covenants to stop former employees from engaging in activities that might compete with their business. Such clauses are usually unenforceable because they are a restraint of trade and are contrary to public policy, unless the employer can show that it has a legitimate interest to protect and has reasonable grounds for having this protection.
In a case that went to the Court of Appeal, a non-competition clause had been poorly drafted and, if it were read literally, it provided the former employer with no protection. An employee whose contract included a restrictive covenant had left his job and joined another company in a similar line of business. The company he had left tried to take out an injunction in accordance with the restriction to prevent the employee from joining the new company for one year after termination of his employment.
The clause in question prevented the employee from dealing with the former employer’s products, rather than similar products. However the High Court decided to give effect to what were obviously the parties’ intentions by correcting what it viewed as a drafting error. The Court of Appeal concluded that it would be correct to interpret an ambiguous clause in such a way as to give it a commercially sensible effect. However in this case, the meaning of the clause was clear and it was poor drafting that gave it no practical effect. The employment with the competitor therefore did not breach the clause.
Restrictive covenants provide employers with a valuable way to protect their commercial interests but they can also have a potentially major impact on the freedom of former employees and can therefore be hard to enforce. In particular, the courts will reject blanket and excessive restrictions.
Legitimate restrictive covenants may prevent a former employee from competing with the former employer; dealing with or soliciting the former employer’s customers or suppliers, or enticing away other employees. A restriction lasting more than a year is unlikely to be justifiable.
An employer taking on an employee subject to a restrictive covenant should take care not to induce the employee to breach the clause, because that would leave the new employer open to being sued.