The purpose of a restraint of trade clause – also known as a restrictive covenant – is to protect a business interest. Every business has information that it considers essential to its success. As a result, it is not surprising that business owners often try to restrict employees from using this information after their employment ends by including restraint of trade clauses in their employment contracts.
Restraint of trade clauses has, however, long been a subject of debate and scrutiny. They will not be automatically enforced by the courts, who will first carefully examine such clauses to ensure they strike a fair balance between protecting employers’ legitimate interests and employees’ rights to choose where to work. Therefore, such clauses need to be drafted narrowly and with care for employers to be able to rely on them.
In this article, we explain what restraint of trade clauses are and when employers might include them in an employment contract. We also look at when such clauses are lawful and when they are likely to be deemed unenforceable and void.
What are Restraint of Trade Clauses?
Restraint of trade clauses aspires to protect a business’s interest by preventing an individual or another business from doing certain actions. This could include prohibiting them from actively seeking work from your competitors, enticing your employees to work for them or setting up the same or a similar type of business nearby.
Such clauses may appear in any contractual relationship where a departing party has in-depth knowledge of the continuing party’s business and customer base. This includes contracts for the sale of a business, partnership agreements, agency and distribution agreements, franchise agreements and many others.
How are Restraint of Trade Clauses Used in an Employment Context?
Restraint of trade clauses can also used in the employment context to restrict employees’ activities, both while working for you and after the termination of their employment. They aim to prevent employees from one day leaving the business and either starting up their own rival business, joining a competitor or taking customers or confidential information with them.
Typically, such provisions will prevent individuals from participating in competitive activities or working for rival companies within a specific geographic area and for a defined period.
The main objective of such clauses is to stop employees from using insider knowledge and connections acquired during their employment to the detriment of their former employer’s business interests.
Are there Legal Implications?
A breach of a restraint of trade clause will amount to a breach of contract. Provided that the clause is reasonable in scope and duration, an employer may accordingly take legal action against a former employee to prohibit any activities in breach of this clause, for example, they may seek an injunction from the courts to prevent the breach from continuing and/or damages to recover any financial losses flowing from that breach. Alternatively, an injunction can be sought to order an employee to do something, such as to give back confidential software.
When Restraint of Trade Clauses are Imposed in Employment Contracts?
Many employers incorporate restraint of trade clauses in the employment contracts of key senior or highly skilled staff at the start of the employment relationship. As such individuals will be in contact with more sensitive information, employers will be keen to place restrictions on senior employees to protect their business interests.
Such clauses can help deter these individuals from competing against them if they resign or their employment is terminated. Similarly, they can be used to stop these individuals from joining direct competitors or may warn off any potential new employers. A former employee who is familiar with your technology, strategic information or customers and clients may be an appealing asset to rival businesses looking to encroach upon your market. Restraint of trade clauses is particularly important in certain sectors where intellectual property, processes or client databases play a crucial role.
Enforceability of Restraint of Trade Clauses
Any restraint of trade clause will only be lawful if the former employer can show that the restriction is:
- intended to protect its legitimate business interests and
- the requests are reasonably necessary to protect those interests.
The courts will judge each case on its facts and consider the context of the restriction. Caselaw has, however, indicated that a legitimate business interest may include the stability of their workforce, client or supplier connections or confidential information.
The restraint of trade must also be reasonable. To this end, the courts will also have regard to factors such as the scope and length of the restriction, and the geographical area in which the restraint is to have effect as well as the nature of the business and the employee’s role and seniority within the business.
When are Restraints Trade Clauses Unenforceable?
Excessive or unreasonable restraint of trade clauses will not be enforceable. As a general rule, the wider the restraint of trade, the less likely it is to be enforceable. For example, a clause restraining any competition in relation to all parts of the employer’s business is unlikely to be enforceable. Similarly, a restraint on trade clause used merely to stifle or prevent any competition with the employer or to restrict the employee from using their skills or experience would also be void.
Another factor that may be taken into account in assessing reasonableness is the relative strengths of the bargaining positions between the parties. The more junior the employee, the more problematic it may be to defend a restraint on trade. In contrast, more high-ranking staff who may have negotiated their contracts on an individual basis, often with the advantage of legal advice, may be more likely to be held to their contracts.
Practical Tips for Drafting Restraint of Trade Clauses
To increase the likelihood of a restraint clause being enforceable, it is important to keep the protection sought reasonable and proportionate. As mentioned, widely drafted clauses are less likely to be found reasonable, therefore, the restraint of trade clause should narrow in scope.
Similarly, restraint of trade clauses should always include a reasonable geographical limitation. For example, if your business usually only operates in London, a restriction cannot be drafted so widely as to restrict competition anywhere in the country.
The courts have also acknowledged that the longer the duration of the restraint, the greater the chances are that it will be found unreasonable so it is important to ensure that the restriction is no longer than is necessary to protect the legitimate business interest.
Restraint of trade clauses can be complex and difficult to enforce unless they have been carefully drafted. It is therefore crucial to seek legal advice at the outset when engaging new employees or looking to amend existing contracts to ensure restraint of trade provisions are drafted comprehensively.
Our experienced Employment team can provide you with expert legal advice on negotiating, drafting and enforcing restraint of trade clauses. We can also provide advice to employees concerning the validity of such clauses in their contracts. Contact us today via email for advice on the best way to approach your specific matter.
FAQ
Can a restraint of trade clause be legally enforced?
A restraint of trade clause is legally enforceable so long as it can be shown that it protects a legitimate business interest (for example, client and supplier connections, trade secrets or confidential information) and that the restriction goes no further than is reasonably necessary to protect that interest.
How long are restrictions in a restraint of trade clause valid?
In the UK, a restraint of trade clause will typically prevent an employee from starting a business in direct competition or from working for a competitor for six months, although this could be longer for key senior staff. This, however, should be considered on a case-by-case basis, taking into account the position of the employee in the company and the particular industry in question.
I have a restraint of trade clause in my employment contract that I feel is unreasonable. Can I get around it?
If the clause has been drafted widely in terms of the scope and duration of the restrictions, it may be deemed unenforceable. The best thing to do would be to get in touch with a solicitor who can provide you with professional legal advice on what your options are.
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