Are My Restrictive Covenants Enforceable? Can They Be Reduced Be Negotiated Under My Settlement Agreement?
Restrictive covenants stop employees from competing with their former employer after their employment has ended. An example of this is a ‘non-compete’ clause, which prohibits an individual from joining a competitor for a certain period of time after their employment ends. There are also restrictions that cover non-poaching of staff and clients and non-dealing with staff and clients for a specific time frame.
If you are an employee with restrictive covenants in your contract, then these clauses might limit what you can after you leave your current job. This may be due to clauses in your contract which prevent you from starting a new role for a extended period, depending on the contract that you sign. Issues with such restrictions can be limited if you negotiate your restrictive covenants when you negotiate new contract terms or when you exit as part of settlement agreement negotiations.
So let’s take an overview of restrictive covenants in employment contracts and how they are dealt with in settlement agreements to see how both can be managed and negotiated to benefit you, the employee or senior executive.
Restrictive Covenants In Employment Contracts
Employers often include post-termination restrictions in senior-level employment contracts. Restrictions are usually stated to apply for a particular period of time from termination. The length and scope of these restrictions can sometimes negotiated before you start a new role and you may be able to agree a carve out of any clients you are bringing with you.
When an employee leaves a job, their employer will often get them to confirm their restrictive covenants in a settlement agreement. Employers will often pay a nominal sum to secure these restrictions and since employee must take legal advice as part of their settlement agreement by law, this may be interpreted as the employee having been advised on and accepted these restrictive covenants.
It is important to understand the potential enforceability of any restrictive covenants as it may be possible to negotiate the removal or reduction of some of those restrictions as part of a settlement agreement negotiation.
When creating a settlement agreement for an employee’s termination, both parties are free to agree upon any terms they see fit and which can be agreed. This can include variation or removal of post-termination restrictions. The main consideration is what both parties are willing to agree to in order to get the settlement agreement done.
For some tips on signing a contract that contains restrictive covenants, why not read our guide on New Employment Terms? This guide, written by David Greenhalgh, offers new employees and senior executives the best advice from a top employment lawyer on how to approach an offer of new employment terms.
Restrictive covenants are put in place to protect the employer against former employees leaving and moving to a competitor, poaching and acting for clients and poaching and hiring staff . To defend against this, the following post-employment restrictions are often put into employment contracts:
A non-solicitation restriction prevent an outgoing former employee from poaching/approaching a client, customer or member of staff with a view to obtaining their business or recruiting them.
Non-solicitation restrictions are used to ensure that the leaving employee or senior executive can’t solicit future work from their previous company’s customers.
Whilst these restrictions are usually bolted into employment contracts, their length may vary in length depending on the role and seniority of the former employee. Typically, non-solicitation restrictions are limited to 3, 6 or 12 plus months in length, depending on the seniority of the employee in question. However, the courts generally tend not to enforce restrictive covenants for more than 12 months.
An employment lawyer acting on your behalf can try and get these restrictions reduced as part of a settlement agreement, and potentially win their client reduced periods of restrictions as a result. The value of competent advice when looking to agree on a settlement cannot therefore be under stated.
Non-dealing restrictions prevent the former employee from dealing in any way with the employer’s customers/clients, prospective clients or staff. Similar to non-solicitation restrictions, this clause in an employment contract may prevent any dealings with clients and staff. This may be important if the leaving employee wishes to set up their own and poach/hire out good staff from their previous employer.
Again, if it was the intention of the leaving party to work in the same field as their previous employer, these restrictions will include a period of restriction which may reduce the financial viability of a proposed new business.
If this applies to you, then you must seek legal advice immediately. David Greenhalgh has nearly 30 years of experience in the field of employment law and of lifting the weight of restrictive covenants.
Contact David Greenhalgh on 020 3603 2177. You can also contact David by filling out our contact form and his team will contact you at a time that suits you.
Non-compete restrictions are the hardest for a departing employee to live with as they prevent the outgoing employee from setting up or working in a competing business. Clearly, anyone who is going to be legally kept out of their chosen area of work for any period of time will lose a competitive edge. David specialises in this area.
The Courts are strict in their interpretation of the above restrictive covenants so they need to be drafted by a specialist employment lawyer with the scope of such restrictions being carefully tailored and restricted. Failure to appropriately draft/restrict these types of covenants can result in them being held unenforceable by the courts. If a contract has been badly drafted this can allow for room for negotiation by an experienced employment lawyer.
Having an employment lawyer review any new employment contract or service agreement you are offered may allow for negotiation of more favourable restrictive covenants or alternatively your employment lawyer may be able to negotiate variations to such restriction as part of the negotiation of a settlement agreement.
Remember, a settlement agreement is exactly that, an agreement between you and your former employer. As such, any and all terms can be changed to meet either party’s interests or preferences by agreement.
Former employees can therefore sometimes get unfavourable restrictive covenants reduced especially where they have potential claims which are being settled under the settlement agreement.
As discussed, the best way to get around restrictive covenants is to have an employment lawyer with restrictive covenant expertise to review your employment contract or service agreement before you sign. Once signed, the only way to reduce such terms is if you are offered promotion where you are given a new contract to sign or where you are offered settlement agreement terms.
Much misinformation surrounds restrictive covenants, and many people are unaware of their existence and impact entirely until it is too late. To dispel these myths, let’s look at some of the most popular questions we receive when advising on such restrictions to help provide some clarity on the situation.
It is a misconception that restrictive covenants will usually be unenforceable.
Whilst badly drafted covenants may be unenforceable, carefully drafted restrictions are likely to be enforceable by the Courts. Where enforceable, the employer will be able to obtain an injunction to uphold the restrictions and/or may be able to seek damages for any losses arising directly from the breach.
An employee who ignores a threat to abide by enforceable restrictive covenants may also have to pay the employer’s costs in obtaining an injunction/award for damages.
Sometimes, but not always.
In addition to a block on you soliciting clients, most well-drafted employment contracts will also prevent you from having any business dealings with former clients for a period. This is true even if they approach you first (see: non-dealing restrictions). If this restriction is reasonable, then it could potentially be enforceable against you.
Not always, as your employment contract might impose restrictions about what happens to contacts you gained due to/during your employment on termination.
For example, you might be contractually obliged to delete certain contacts from your social media accounts before you update your profile to say you have left. In addition, even though you may have introduced your own clients to your employer, that doesn’t mean that unless expressly stated and carved out in advance, they won’t be covered by the post-termination restrictions in your contract.
Even if you think you have carefully deleted any trace of incriminating emails, documents and text messages, any harmful communications you’ve sent using a work device can usually be recovered. In a relevant case, an ex-employee “dropped” his work laptop in a pond, but the old employer had the pond dredged and managed to recover incriminating information!
With the modern-day fascination and the use of social media tools like LinkedIn your previous employer has a ready made platform to keep an eye on what you are up to after you leave.
Not necessarily. We work with senior executives who are looking to join a competitor or start their own business to properly assess whether the restrictive covenants in their contracts of employment are likely to be enforceable.
This is a complex and constantly changing area of the law and the answer will depend on a number of factors. So, for example, the reasonableness of post-termination restrictions is considered on the date they were given to the employee. So, an employer who gave a very junior employee senior-type restrictions at a time when the employee joined may make them unenforceable now. This is still true even if the employee has by now been promoted to a senior level in the organisation.
Even where restrictions are enforceable, if clients want to follow you and you have not solicited them to do so, it is sometimes possible to broker a deal with your former employer whereby you pay a percentage of related fees for the remaining period of the restriction in return for you being allowed to take clients.
David is a recognised expert on restrictive covenants and acted on the groundbreaking case of Sunrise Brokers v Rogers. If you are offered a new contract, a settlement agreement , if you are considering moving to a competitor, approaching clients of your former employer or if you are thinking of setting up on your own and are concerned about any potential restrictions, call David Greenhalgh on 020 3603 2177.
This article/blog is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.