What is a restrictive covenant within a contract of employment?

Posted in : Seamus Says - Employment Law Discussion on 13 December 2017
Seamus McGranaghan
O'Reilly Stewart Solicitors

Q. What is a restrictive covenant within a contract of employment?

Scott: On the topic of restrictive covenants in the contract of employment, now that the world is so plugged into remote and agile working, and the office or business can be established virtually anywhere, traditionally drafted restrictive covenants, but not setting up in competition based on geographical proximity to a competitor seemed to be virtually obsolete. So maybe you can deal with that. And first of all, Seamus, could you explain what a restrictive covenant is within a contract of employment?

Seamus: Well, certainly you will see either within the contract itself or else within a specific document appended or attached to the contract of employment, sometimes you'll have restrictions that are set. And the types of restrictions that are normally set out would be protected in terms of confidentiality and protection in terms of issues relating to trade and non-solicitation of employees and things like that.

But the reality is that the restrictive covenants can apply before or during the lifetime of the employment, and then post-terminations as well.

Scott: And some of those some of those are okay. Not stealing your staff and such like not divulging confidential information. Now that last cycles back to the sender checking and all that kind of stuff.

Seamus: Yes. So some of the restrictive clauses can last a period of perpetuity in terms of knowledge until that knowledge would be maybe delivered in the public. Or alternatively, they can be for a period of time. And you'll tend to find the restrictions in relation to trade as to what the employee can do after they leave that employer, as to where they can work, what customers of the existing employer they can contact.

And those sorts of things will be usually time limited for a period of sometimes six months, sometimes a year, and depending on what the person's job was and what the risks are.

Scott: So generally speaking, the law would say, not I say generally speaking but when, where they use them. If there's a reasonable time period if you're dealing with it reasonably, say look, we've got a right to protect, legitimately protect our business interests. And it's not on restraint of trade, they are lawful, they can be enforced specifically terming to the geographical thing.

In the past you would have had the classic, there's a hairdresser and you're not allowed to open up a rival hairdressers within a 3-mile radius or within greater Belfast or whatever it happens to be, because you know, you get your business anywhere in the world that the question we're saying could be obsolete. So, what about the geographical proximity and locations now? What about that aspect of a restrictive covenant?

Q. Can you restrict in terms of geographical proximity?

Seamus: Yeah. I think in the way that we work is very much dependent on how your business works itself. It might be very easy to put a restriction on in terms of that. And that maybe, of course, we're always looking back to make sure that the restrictive covenants are balanced, and that they're necessary to protect the needs of the business. But certainly that you can definitely see that there's a watering down of the geographical aspect of restrictive covenants on the basis that you can have a laptop and/or a mobile phone and work anywhere in the world at all. You don't necessarily have to be based in a certain area or location. For me, it's more about protecting the sources of your business.

And from that aspect, you could be dealing with restrictive covenants that say, "Well, you can't trade within a certain area, you can't trade with existing clients or clients that have been yours for the last 12 months of your time with the company." So for me it's more about protecting the sources of the business rather than in a specific area. And saying that age-old problem with restrictive covenants tends to be that they're very complex, and you have to read them and re-read them, and you really have to break them down to get an understanding of them. And whenever you get to the bottom of it you find that it doesn't really protect you in any sense whatsoever in terms of the business.

For me it's very important that you're striping it back to look at, "Well, what are the aims that we're trying to protect here in respect of our business and how do we go about doing that?" There's no point lifting in a blank and sticking it into a contract or putting it into a restrictive covenant agreement. And a handout to the employee, explain it to the employee the best you can and get them to sign and say they're protected.

I think you really have to go on the individual needs of the company, seek to protect the legitimate aim of the business, explain that to the employee. And both at the time and they're signing, and they're free to go and get their own legal advice at the time when they sign. And it's important as well at the point of when the person resigns and that you do bring them back in. You meet with them, you explain, you go through the contract, you go through the restrictive covenants. And then after that, you put it in writing to them. And just to make sure that you're complying with all your own obligations because often the employee will say, "I don't remember signing it or I don't remember any of this."

Scott: Or it could be changed because of being promoted over time and then they then have other information, and the stuff they used to have is no longer relevant or the restriction is the longer... So those change over time, we've got to keep them all up-to-date.

Geographically though, really what we're saying is rather than restrict it by where the business is located, it's restricting where the people get their business from. And if that's you do all your business in America or Indonesia, then that's where you would just try and restrict where that would set up business. If you're not doing that in greater Belfast, you're not doing it in the Republic of Ireland, you can't restrict any kind of growth there from the employee's point of view. It's open season there.

Seamus: I think that's the basics of what... And the other issue that I've come across in respect of restrictive covenants is that they are complex. And whenever you get them in before a judge if you're going for injunctive relief or anything like that, the difficulty tends to be that a judge wants to see a clear and concise restrictive covenant clause. If the judge considers that it's difficult to understand, the judge will automatically say, "How do you expect the employee to understand this or to have knowledge of it?"

I had a case where we inherited a restrictive covenant in an agreement. We got a strong indication from the judge that it was just too complex for anybody to understand. You're referring back to your clauses within clauses and sub-clauses. And we were able to negotiate and work our way around it in terms of settlement. But it was a clear direction from a judge here in Belfast County Court that he felt that the restrictive covenant wasn't clear in terms of what it was.

Scott: And of course, if it's not clear, then it's not enforceable. And if it's not enforceable, you're not protected.

Seamus: Well exactly. You know, so you're better taking the point of view that your restrictive covenant is always there to protect the legitimate aim of your business. It's not there to penalize an employee or to be annoyed at an employee for leaving and slap them with a strong restrictive covenant or anything like that. It's there to protect the legitimate aim. And I think if you base it and draft it on that basis, that's the better way of looking at it.

 

This article is correct at 13/12/2017
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Seamus McGranaghan
O'Reilly Stewart Solicitors

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