Understanding Breach of Restrictive Covenants in Employment Contracts: Rights and Remedies for Employers

In the realm of employment law, restrictive covenants play a crucial role in protecting an employer’s legitimate interests after an employment contract is terminated. These covenants are designed to prevent former employees from engaging in certain activities that could potentially harm the employer’s business. However, the enforcement of restrictive covenants can be a complex and in some respects uncertain legal matter.

In this article, Asim Din, Commercial Dispute Resolution specialist, provides employers with a comprehensive understanding on breach of restrictive covenants in employment contracts, along with the rights and remedies available to them.

What are restrictive covenants?

Restrictive covenants are contractual clauses inserted into employment agreements to restrict an employee’s actions or behaviour after their employment has ended. Common forms of restrictive covenants include:

Non-Competition Clauses: Seek to prohibit employees from working for or starting a competing business within a specified geographical area and for a defined period.

Non-Solicitation Clauses: Seek to prevent employees from soliciting clients, customers, or other employees of the business for a certain period following termination.

Non-Disclosure Clauses: Seek to prohibit the disclosure of confidential information obtained during employment.

Non-Dealing Clauses: Seek to prevent employees dealing with customers or prospective customers of the former employer for a specified period, even if that customer makes the initial contact.

Non-Poaching Clauses: Seek to prevent another party from approaching a businesses’ employees.

Garden Leave Clauses: Requires an employee to stay away from the workplace and cease work after they have handed in their notice.

Enforceability of restrictive covenants

To be enforceable, restrictive covenants must strike a fair balance between safeguarding the employer’s interests and not unduly restricting the employee’s career prospects. Courts often scrutinise these covenants closely to determine their reasonableness and legality. Some factors that influence enforceability include:

Reasonableness of Scope: The restrictions must be reasonable in terms of geographical area, duration, and scope of activities prohibited.

Legitimate Business Interest: The employer must demonstrate a legitimate business interest that requires protection, such as confidential information, customer relationships, or trade secrets.

Public Policy: The restrictive covenant must be in the public interest and not unduly limit healthy competition or the employee’s ability to find suitable employment.

Retrospective restrictive covenants

In the vast majority of cases, having a restrictive covenant in place from the outset of an employment contract is the best course of action. However, circumstances may dictate the need to introduce a retrospective restrictive covenant, or to amend an existing covenant after the employment has started.

You will be free to implement a retrospective restrictive covenant with the employee’s consent although uncertainty can be created if there is no consideration passing to the employee (eg a promotion or a pay rise) . Even without the employee’s consent, certain options may still be available to you:

• You can unilaterally impose the change. Note that this may open up the possibility of an employee making a claim for constructive dismissal if they are forced to resign as a result of the change to the restrictive covenant.
• You can terminate the employee’s employment and re-engage them on new terms. This is a risky action, as a claim for unfair dismissal could be launched by the employee, depending on the circumstances.

In each case an employer will need to demonstrate a real commercial need and demonstrate that the amendments are necessary and reasonable to impose in the circumstances.

Breach of restrictive covenants

When a former employee violates any of the restrictive covenants outlined in their employment contract, they are said to be in breach. Breaches can occur in various ways, including:

Engaging in Prohibited Activities: An ex-employee starting a competing business or working for a competitor in violation of the non-competition clause.

Soliciting Customers or Employees: Breaching the non-solicitation clause by attempting to poach clients, customers, or fellow colleagues.

Disclosing Confidential Information: Revealing trade secrets or confidential data of the former employer, violating the non-disclosure clause.

Engaging with Customers: Accepting an approach by a customer or client of a previous employer in breach of a non-dealing clause and doing business with that customer or client.

Rights and remedies for employers

Upon discovering a breach of restrictive covenants, employers have several rights and remedies at their disposal:

Injunctive Relief: Employers can seek an injunction from the court, which would prohibit the former employee from continuing the prohibited activities. Injunctions are preventive measures to stop potential harm.

Damages: Employers may claim damages suffered as a result of the breach, including loss of profits or damage to business reputation.

Account of Profits: If the breaching employee has gained financially from their wrongful actions, the employer may be entitled to a share of those profits.

Delivery Up or Destruction of Confidential Information: Courts may order the return or destruction of any confidential information or proprietary materials improperly taken by the ex-employee.

Cases where restrictive covenants may not be enforceable

There are a number of potential reasons for a restrictive covenant not being enforceable.

• The covenant is too restrictive and wide in their impact
• The covenant is not reasonably necessary to protect the legitimate business interests of the employer
• The covenant is not relevant to an employee’s role (particularly if their role has changed since the covenant was made)
• The covenant was unenforceable when the contract was first entered
• The employee has not signed their employment contract and the employer cannot demonstrate that the employee has accepted the terms
• There is a lack of consistency across multiple employment contracts (eg the employer takes a broad brush approach and imposes the same restrictions on everyone rather than looking at each employee or at least class of employee separately)

 

How can Butcher & Barlow help?

At Butcher & Barlow, we understand the complexities and challenges employers face when dealing with breach of restrictive covenants in employment contracts. This often necessitates swift action in order to protect the employer’s business, and so it is important you seek specialist legal advice early.

Our experienced team is well-versed in dealing with matters such as this and has a proven-track record of providing invaluable assistance to employers in navigating these situations effectively.

Drafting employment contracts with care

We will work closely with your business to draft employment contracts that include well-crafted restrictive covenants. By understanding your specific needs and legitimate interests, we ensure that these clauses are tailored to seek to  protect your business while remaining reasonable to seek to give the employer the best chance of success in any court proceedings.

Evaluating the Enforceability of Restrictive Covenants

If you suspect a breach of restrictive covenants, we will review the circumstances surrounding the alleged breach. By examining the language and scope of the restrictive covenants we will determine their enforceability under applicable laws and the appropriate course of action. We will help you understand your rights and the available remedies, enabling you to make informed decisions to safeguard your business.

Pursuing legal remedies

If necessary, we can represent you in seeking legal remedies for the breach. Whether it involves pursuing injunctive relief to stop the employee from continuing the prohibited activities or claiming damages for losses incurred, we will work diligently to protect your business.

Mediation and alternative dispute resolution

In certain cases, litigation may not be the most desirable path to resolution. Our team are skilled in mediation and alternative dispute resolution methods, seeking amicable solutions that can save time, money, and potential damage to business reputation.

Breach of restrictive covenants in employment contracts can pose significant risks to your business. At Butcher & Barlow, our team of employment lawyers and dispute resolution specialists are able to assist you throughout the process – from drafting legally sound employment contracts to providing effective solutions if breaches occur.

We recognise that each breach of restrictive covenants case is unique, with its own set of circumstances and challenges. Our team takes a personalised approach, providing solutions that align with your business objectives and legal requirements.

By partnering with us, you can proactively protect your business interests and ensure a smoother employment relationship with greater peace of mind. Contact us today to see how we can help safeguard your business from the challenges of restrictive covenant breaches.

Asim can be contacted at adin@butcher-barlow.co.uk