Restrictive covenants are only enforceable if they are only as wide as they need to be to protect a legitimate business interest regarding that employee. They should be carefully considered when being agreed to and reconsidered whenever an employee moves sideways, up, or down.
The recent case of Bartholomews Agri Food Ltd. v Thornton (2016) is an illustration of how badly thought-out restrictive covenants applied across the board are usually unenforceable. Read on to find out more.
What are Restrictive Covenants?
Restrictive covenants are clauses within employment contracts that prevent a past employee from moving to an organisation that rivals or competes with their previous employer. Similarly, it stops them from dealing with previous customers, clients or businesses that were gained during their time with their previous job. These clauses are valid for a particular period, which must be stipulated within the contract.
Why are they Included in Employment Contracts?
The main reason employers look to include restrictive covenants in employment contracts comes from protecting their customer, client and/or supplier relations and, quite frankly, their income. An ex-employee could propose a risk to these commercial contracts and sales if they set up on their own or took their contacts with them to their next company.
Enforcing Restrictive Covenants
For restrictive covenants to be enforced successfully, an employer must consider a number of factors. It is crucial for these points to be taken into account; if ever an ex-employee challenged their restrictive covenant clause, these must be sufficiently narrow and justified.
Take into consideration the following:
- Geographical Scale – how wide an area will the restriction cover?
- Time Scale – how long will the covenant stand?
- Activities – what in particular is being restricted?
- Reason for Protection – what are you trying to keep a secret?
- Job Title – how senior is the employee?
For some guidance, often board geographical areas are considered unreasonable. Similarly, time frames exceeding 6-12 months are seen the same. The only time wider geographical restrictions are considered is if the reason behind the covenant is aiming to protect trade secrets.
There is no one-size-fits-all policy when it comes to restrictive covenants in employment contracts. Enforcing them in this manner will only lead to successful challenges further down the line.
Types of Restrictive Covenants
The most common types of restrictive covenants include:
- Non-Competition Covenants – places restrictions on a previous employee that affect them working for a competitor
- Non-Solicitation Covenants – stops a former employee from poaching contacts from their previous job, including customers, clients and suppliers
- Non-Dealing Covenants – prevents all communications and dealing with past customers, clients and suppliers, irrespective of who contacted who
- Non-Poaching Covenants – restricts a former employee from taking former colleagues with them
Garden Leave
Often used in conjunction with restrictive covenants are Garden Leave clauses. When these are included, an employee is required to leave the office at the start of their notice period, spending the specified time frame at home. This could be the notice period in its entirety, all a proportion of this. During this time the soon-to-be ex-employee will still receive their usual salary and benefits.
Employers opt for this additional level of protection to stop this employee from being privy to confidential information, including possible new contracts and clients which may still be under negotiations. What information they do know, would be out-of-date with the business’ current affairs.
A Sloppy Restrictive Covenant
In Bartholomews Agri Food Ltd. (BAF) versus Thornton, BAF was a supplier of goods to the agricultural sector. Mr Thornton began as a trainee in 1997. He resigned in December 2015 to take up employment with a competitor. As you now know, poorly thought-out restrictive covenants will come back to haunt an employer. No blanket covenant can be applied to all employees, they must be tailored to the criteria we mentioned earlier.
BAF applied to the court for an injunction to enforce the terms of a restrictive covenant in Mr Thornton’s unemployment contract which provided that: –
- Thornton would not be engaged in work supplying goods or services of a similar nature competing with BAF to BAF’s customers for six months post-termination;
- Would not work for a trade competitor within BAF’s trading area (in the contract specified to be Sussex, Kent, Hampshire, Wiltshire and Dorset) for six months.
The Court’s Decision
The court held the covenant was unenforceable. It had been imposed on Mr Thornton when he began working as a trainee with no experience and no customer contacts. The clause was inappropriate for him then, and in accordance with a decision known as Pat Systems v Neilly, if a restrictive covenant is unenforceable due to the employee’s status at the time it was agreed, it remains unenforceable even when they have become a senior employee.
The court also decided the restrictive covenant was wider than was reasonably necessary to protect BAF’s business interests because it applied to all of BAF’s customers even though Mr Thornton only had dealings with a very small percentage of their customer base.
The court stated a restriction limiting Mr Thornton’s contact with customers he had dealt with would have been okay if agreed with him when he was last promoted.
The employer was also unable to enforce its “confidential information” clause which it had not specifically defined.
Employers also tend to agree on contracts of employment with restrictive covenants when somebody starts with them, but these, as well as not being checked as appropriate at the time, are not reconsidered on promotion or movement to another job either.
If you require legal support with your employment contracts, contact our specialist solicitors today.
