Restrictive Covenants

Restrictive covenants allow employers a degree of business protection from former employees challenging their business interests on leaving a business. There are generally considered to be five primary types of restrictive covenants:

• Non-competition – where you agree not to compete against a former employer whether through your own business or a competitor
• Non-solicitation – where you agree not to approach customers (and possibly prospective customers) of your former employer in order to do business with them
• Non-dealing – just as with the non-solicitation clause, this prevents you dealing with customers or prospective customers of your former employer. However, with a non-dealing clause, you are prohibited from dealing with those customers or prospective customers even if they approached you first
• Non-poaching – where you agree not to attempt to bring employees of your former employer into your new business or your new employer
• Confidentiality – where you agree not to divulge trade secrets or information confidential to your employer to third parties

These restrictions can seriously hinder your ability to start a new business or take up new employment and so you should take legal advice before signing up to any restrictive covenants.

A considerable amount of case law exists in relation to restrictive covenants, covering such issues as what they can protect, how expansive they may be and what sort of employees is it reasonable they affect. As an employee the key things to remember with restrictive covenants is that:

• They must be reasonable in their aims
• They protect legitimate business interests, and
• They are proportionate and drafted no wider than necessary to safeguard that business interest

With restrictive covenants, much hinges on the factual circumstances of your employment situation and so you should seek legal advice if you are unsure of the enforceability of your restrictive covenants under employment laws.

If your employer has reason to believe you have breached your restrictive covenants, the most common course of action is for them to firstly obtain an interim interdict. This is effectively a court order compelling you to stop acting in breach of your restrictive covenants.

In Scotland all that an employer needs to show for an interim interdict to be awarded is that there is a possible case that you are in breach. So it is possible for an interim interdict to be issued against you when you have not in fact breached your restrictive covenants. In that case you can, of course, challenge the order, but until the court removes it, you would be prohibited from carrying out the activities it prevents. Furthermore, you would not receive notice that your previous employer is seeking an interim interdict until it had been granted.

This situation can, however, be avoided by lodging ‘caveats’ with the court which require you to be informed of any attempt by an employer to obtain an interim interdict.

The effect garden leave may have on any restrictive covenants you are bound to hinges largely on the terms of your employment contract. For many senior positions, inclusion of a right to put an employee on garden leave is usually standard as it allows an employer to exclude a departing employee from the workplace.

If you are put on garden leave as an employee and your contract specifically allows your employer to do so, you will remain bound by the terms of any restrictive covenants as there has been no breach of contract.

However, the position is different if your employment contract does not provide a garden leave clause. If your employer places you on garden leave without there being contractual provision for that, this may be a breach of your employment contract induced by your employer. This is significant because all employment contracts have an implied right of work and non-contractual garden leave forced on you by your employer would breach that right. As a result of your employer’s breach, it is likely you would no longer be bound by your restrictive covenants. You should always take legal advice over a possible breach of employment contract.

Your ability to carry on working with a client will almost certainly be affected by any of the most common restrictive covenants. If your employment contract or settlement agreement contains a non-competition, non-dealing or non-poaching clause, any attempt on your part to continue working with a client is likely to put you in breach of your restrictive covenants under employment laws. You should take legal advice as to the scope of any restrictive covenants before agreeing or making any arrangements to continue working with a client whether as an employee at a new business or if you have set up your own business.