Are My Restrictive Covenants Enforceable? Can They Be Negotiated Under My Settlement Agreement?
Restrictive covenants are rules that 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. There are also covenants such as ‘non-dealing’ clauses that prohibit employees from working with certain clients for a specific time frame.
If you are an employee with restrictive covenants in your contract, then these clauses might limit you when you leave that job. This may be due to a clause which prevents you from starting a new role for as little as a few months to years, depending on the contract that you sign. This can be resolved if you negotiate your restrictive covenants as part of your settlement agreement.
So let’s take an overview of restrictive covenants and settlement agreements to see how both can be 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 and can be a few common clauses, which can be negotiated.
When an employee leaves a job, their employer may ask them to confirm their restrictive covenants in a settlement agreement. Since the employee must gain legal advice as part of their settlement agreement by law, this may be interpreted as the employee gaining a legal understanding of these restrictive covenants.
It also may allow the employer to interpret the restrictions based on the circumstances at the time of termination, rather than when the contract was originally signed. Both of these situations present issues for the employee.
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. This can include post-termination restrictions. The main consideration is what both parties are willing to agree to in order to finalise the agreement.
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 react to new employment terms.
Restrictive covenants are put in place to protect the employer against former employees leaving and taking their contacts and clients with them. To defend against this, the following post-employment restrictions are often put into employment contracts:
A non-solicitation restriction is a demand placed by the employer where the outgoing employee is restricted from approaching a client, customer or member of staff with a view to obtaining their business or recruiting them.
Non-solicitation restrictions are enforced to ensure that the leaving employee or senior executive can’t solicit future work from their previous company’s leads.
Whilst these restrictions are usually bolted onto employment contracts, their length may vary in length depending on the role of the previous 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 tend not to enforce restrictive covenants for more than 6 months.
An employment lawyer acting on your behalf can reduce these periods of restrictions via 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 be understated.
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 former clients and staff. This may be important if the leaving employee wishes to set up their own organisation and poach 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 not be financially viable to the former employee.
If this applies to you, then you must seek legal advice immediately. David Greenhalgh has over 20 years of experience in the field of employment law and lifting the weight of restrictive covenants, offering more favourable terms to his clients.
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 prevent the outgoing employee from setting up and being involved (which includes being employed) in a competing business. Clearly, anyone who is going to be legally forced out of their specific field of work for a long period of time would lose a competitive edge and familiarity with that field of work – and would need to be compensated as such. This is something that David specialises in.
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. Failure to appropriately restrict these types of covenants may result in them being held unenforceable.
Having an employment lawyer view your contract and the restrictive clauses within could bring more favourable terms to the settlement agreement between you and your former employer.
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.
Former employees can therefore exchange less favourable exit terms, such as the length of time a restrictive covenant is in place, for a more preferable cash payout or visa-versa.
As discussed, the best way to get around restrictive covenants is to have an employment lawyer with settlement agreements in mind to review your employment contract before signing your contract. Once signed, the best way to restrict restrictive covenants themselves is to wage settlement agreement terms against the restrictions to find a more favourable settlement for yourself.
However, misinformation surrounds restrictive covenants, and many people are unaware of their existence entirely. To dispel and demystify these myths, let’s look at some of the most popular questions we receive when facing 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 respect 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. 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 profiles 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, 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 with tools like LinkedIn, do you think you could hide forever? If in 3 years’ time, your previous employer was to find out that you breached your contract, they would have a reasonable cause to pursue you in Court.
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 at 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 fails to prove they are enforceable 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 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.