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Restrictive covenants and contracts of employment – Advice for employers

March 15, 2017

For most employers, setting in place rules and responsibilities for employees during their time with the company is their most important consideration. This can be achieved through having effective contracts of employment, alongside employee handbooks.

Employers should, however, be putting thought in to what happens once employment ends to ensure that they are protecting their business interests. After the employee has resigned, or been dismissed, they are no longer bound by their contractual terms.

Restrictive covenants are an effective tool for restricting damaging activity by the ex-employee but employers need to carefully construct these covenants to ensure they are enforceable.

restrictive covenants

Contracts of employment

Contracts of employment are vital to state the rules, rights and responsibilities that employees have during the course of their employment.

It is commonly thought that the employment contract is made up of the piece of paper an employee receives at the start of their role but this is not the case; a contract is made up of many different terms, including written, spoken and implied, and a number of documents.

The first document an employee receives is usually the statement of main terms; a legally required document that employees become entitled to after one months’ service and must be given before reaching two months’ service.

The ‘statement of terms’ document must contain key terms, including:

Additional information can be included on this statement but is not legally required.

Terms of employment

Important contractual terms that employers need to know are those which are implied, either because they are so obvious that they don’t need to be expressly written or because they are needed to make business sense of the contract.

Examples of implied terms are that an employee won’t steal from the employer, the duty of fidelity and not acting in competition with the employer and the duty of mutual trust and confidence.

Other terms which form the contract of employment will include statutory terms, such as minimum wage, and any clauses contained in the employee handbook which state they are contractual terms.

Setting in place comprehensive, detailed and accurate contracts of employment is vital to ensure both employer and employee are placed in a strong position going forwards. The employee is aware of their contractual responsibilities outlined in the documents and the employer can apply any contractual rights correctly and rely on any restrictions if needed.

Employers should ensure they are receiving a signed and dated copy of any documents which can be used as evidence that the employee has received, and understood, the information contained in these.

Using restrictive covenants in employment contracts

Restrictive covenants are vital extra documents which employers should introduce to place restrictions on the actions of the employee once their employment end. They are used to safeguard the employer’s interests by protecting information, customers and staff that the employee would have had contact with as part of their role.

The main areas which restrictive covenants protect are:

Non solicitation

This prevents the ex-employee from approaching current, or prospective, clients of the employer to conduct the same business as that conducted by the employer.

Non competition

This prevents the ex-employee from carrying out the same business as the employer, either on their own account or with a competing business.

Non poaching

This prevents the ex-employee from taking staff from the employer.

Confidentiality

This can be used to protect specific business information such as trade secrets, new technology, bespoke methods etc.

Ensuring restrictive covenants are enforceable

Restrictive covenants usually restrict the ex-employees actions over a time period, or a geographical location, after the end of their employment. These limits will differ from employer to employer but will generally not last for longer than 12 months.

Employers have to be very careful when constructing restrictive covenants to ensure they are enforceable, if needed. Restrictive covenants have to be drafted reasonably.

This means they cannot place a blanket restriction on future employment, any time period included needs to be reasonable and any geographical radius cannot be unrealistically wide.

In order to do this, employers should take in to account factors such as the seniority of the particular employee, the specific business carried out and the location of the company and any competitors. Seniority is an important consideration because, in most cases, the more senior the employee is, the higher their access to sensitive, confidential data such as customer lists.

Ensure employees are aware of any restrictive covenants

Restrictive covenants should also be clearly drafted to ensure the individual is fully aware of the restrictions. Each prevention clause should be covered separately to ensure their inclusion is clear and any terms used, i.e. prospective client, should also be defined.

Having the covenants contained in a separate document, and not at the end of the employment contract, is also important to draw attention to their specific existence. Having a signature at the end of this separate document will be important evidence when trying to enforce this.

Restrictive covenants are enforced through the civil courts rather than employment tribunals. Employers can seek an injunction against the activities of the employee which are in breach of the restriction.

Employers may also be able to claim damages for the breach but they have to be able to show that their business has suffered financial loss. This may be the case where the ex-employee has set up a competing business and has poached a large client from their old employer.

About the author

This guide has been written exclusively for ByteStart by Peter Done, Managing Director of Peninsula Business Services – the UK’s leading specialist Employment Law, HR and Health & Safety service. Peter has written a series of employment guides for ByteStart, including;

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