Time to update restrictive covenants

A recent survey of City solicitors in Legal Week revealed that 46% of the partners surveyed said that post-termination covenants “are no longer relevant in today’s business environment”, while just 14% thought that “restrictive covenants are still legitimate”.

The results are surprising, because such provisions are routinely included in the employment contracts of key and senior staff. Those who work in this area know how effectively restrictive covenants and confidential information provisions can protect legitimate business interests (such as confidential information, clients, and staff). But the view that they are more trouble to enforce than they are worth is not uncommon.

Bad rap

Why do restrictive covenants get such a bad press? Perhaps it is because English law determines that restrictive covenants are unenforceable unless they are drafted no more widely than necessary to protect a legitimate business interest. If the covenant is too wide, the court will not rewrite it to make it reasonable – it will simply be unenforceable in its entirety.

Clearly, this can be very harsh where an employer has legitimate business interests that deserve protection, but the drafting of a covenant is defective. The law seems outdated in the context of sophisticated senior and key staff, who are often relatively wealthy and legally represented. If such an employee takes substantial benefits under a contract of employment in return for agreeing to certain post-termination restrictions, why should these not be enforceable?

Some feel uncomfortable with the idea that employers can restrict the activities of employees without compensation, having already taken the benefit of the employee’s performance under the employment contract.

As a potential solution, in France, Germany and Italy, employers must pay staff to enforce non-competition and non-solicitation restrictive covenants (no payment is required for covenants prohibiting the poaching of staff).

Others are concerned about restricting ‘ordinary’ employees. In fact, basic categorisation of employees to exclude those who cannot be restricted should be possible. For example, in Italy the law applies different maximum periods of restriction depending on the seniority of employees (five years for senior managers, three years for others).

More trouble?

Finally, some people believe that more easily enforceable covenants will mean wide and unreasonable restrictions. But this needn’t be the case. When the courts consider garden leave provisions, the starting point is that they are enforceable as a matter of public policy, unless they are longer than necessary for the protection of an employer’s legitimate business interests. This may seem like the same test as that for restrictive covenants expressed the other way around, but the court can substitute an unreasonable period of garden leave with a reasonable one, and the provision will be enforceable.

Restrictive covenants are an important protection for businesses. Clearly, the time has come to overhaul the difficult and outmoded public policy approach to restrictive covenants.

Restrictive covenants: an alternative approach

  • Restrict the application of restrictive covenants to certain categories of employees (for example, managers, staff with technical information amounting to trade secrets).
  • In the case of these protected categories, the employer should be required to show that it requires legitimate business interests to be protected.
  • Staff should be paid for the period during which non-competition and non-solicitation restrictions are enforced.
  • Non-poaching of employees’ restrictive covenants should be more easily and widely enforceable, and no payment should be required in return for enforcement (on the basis that such activity should not be an unavoidable consequence of an employee changing employers).
  • The current ‘all or nothing’ approach should be replaced – the court should substitute a reasonable restriction if the clause is drafted more widely than is necessary to protect a legitimate business interest.

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