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Restrictive Convenants - Keep Them Reasonable And Under Review
Restrictive covenants allow employers to protect their trade secrets and deter employees from participating in any competing activity. However, to be enforceable post termination of employment the restrictive covenant will be unenforceable as a restraint of trade unless the employer can show that the restrictive covenant is necessary to protect a clear and legitimate business interest, and that the clause is reasonable in all the circumstances. The greater or wider the restriction is, the more likely it is that it will be deemed unenforceable, and unless there is a valid substitution clause in the agreement, the employer runs the risk of ending up with no protection at all.
The lessons are:
- keep the restriction reasonable and only as wide as is necessary – i.e. the length of the restriction or the geographical area must not be too wide;
- a restrictive covenant should not be applied to all employees regardless of the job which they do or their seniority and the extent of each covenant should be drafted on an employee by employee basis;
- the restrictive covenants should be reviewed periodically, and especially on promotions. This is an ideal time to reviewamend contracts generally. If an employee has progressed up the employment ladder but has no restrictive covenants, a new contract should be entered into including these new terms as part of an offer of promotion. If the old contract contains restrictive covenant, the reasonableness of them should be addressed and amended where appropriate. If the covenants are reasonable, then the employee should specifically re-affirm the covenants or, where more appropriate enter into a new contract containing fresh covenants.
In the case of Patsytems Holdings Limited v Neilly 2012 a restrictive covenant was unenforceable against a Director of Global Accounts earning 80,000 p.a., notwithstanding that in 2005 he had signed a letter on promotion which said that all other terms of his original contract remained unchanged. His original employment in 2000 was as a Manager earning £35,000 and his contact contained restrictive covenants including one which prevented him working for a competitor for 12 months post termination. The Court held that the reasonableness of the covenant had to be considered at the time it was entered into – not at the time when the employer wanted to enforce it. The covenant was held to be “too harsh a restriction for an employee at his level” when it was entered into. As such it was unenforceable, despite the fact that the same covenant may have been reasonable for the role which the employee held on termination. The employee had not explicitly confirmed his agreement to the covenant on his promotion – all he had done was to confirm that the terms of his original contract had remained unchanged, and this was held to be insufficient to bind him.
If you wish to discuss any matter arising from this article or any other employment problem please contact Janet Long by email to firstname.lastname@example.org
The contents of this article are intended for general information only. It is not a substitute for legal advice, and shall not be deemed to be or constitute legal advice. We therefore cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. We will, however, be pleased to advise you on the specific facts of your case.