Restrictive Covenants Flashcards
What is a restrictive covenant?
A restrictive covenant is typically a clause in a contract which prohibits an employee from competing with their ex-employer for a certain period after the employee has left the business.
It is designed to protect its legitimate business interests; and extends no further than is reasonably necessary to protect those interests. NORDENFELT V MAXIM NORDENFELT
What what are the requirements of a restrictive covenant?
For a restrictive covenant to be enforced it must not be drafted too widely. It will be for the employer, in the event of a clause being challenged, to show that the clause is justified and sufficiently narrow.
An employer may also be required to evidence any connection between the employee and any information that is being protected.
The extent of clauses, therefore, must be relative to the employee’s position within the business. As more senior employees will be in contact with more sensitive information, restrictions placed upon them may be justified as being more onerous.
In deciding what is reasonable, what does the courts look at?
In deciding what is reasonable, the courts will look at:
1) Duration. Three to six months is generally acceptable depending on the industry. 12 months may be acceptable if the employee is senior or has access to confidential information.
2) Geographical area. A worldwide restrictive covenant might be enforceable for big international companies but not for smaller businesses. Clauses which go beyond the area in which the business operates will generally not be valid, nor will clauses that cover densely populated areas such as the City of London. OFFICE ANGELS V RAYNER-THOMAS
3) The type of work it prevents the employer performing. Restrictive covenants should generally be limited to the type of work the employee does. FELLOWES V FISHER – a restrictive covenant that prevented a Conveyancing clerk working in the “legal industry” was too wide.
What is the Blue Pencil Test?
The Blue Pencil Test was seen in TILLMAN V EGON.
The offending words in the clause could be removed to render the remainder of the clause enforceable.
The ‘restraint of trade’ doctrine means that restrictive covenants will be valid only if they go no further than reasonably necessary to protect the business interests of the employer.
Although a court will not rescue a restrictive covenant by rewriting it, if a covenant contains an unenforceable provision a court may sever the offending clause(s) and leave the rest standing.
This lawyers refer to as the ‘blue pencil’ test (because blue was the traditional colour denoting amendments to legal documents.
What is the ‘restraint of trade’ doctrine
The ‘restraint of trade’ doctrine means that restrictive covenants will be valid only if they go no further than reasonably necessary to protect the business interests of the employer.
What are the basic principles governing severance for a restrictive covenant?
Whether or not such severance can take place is a question of law and will depend on the court’s construction of the contract.
Two basic principles govern severance:
1) the severance must be carried out without adding to or altering the remaining wording (this can be traced to the 1920 case of Attwood v Lamont)
2) and the removal of the severed part must not affect the meaning of the part remaining.
What is a non-competition clause?
Non-Competition Covenants are restrictions on the former employee working in similar employment for a competitor or setting up in competition with the employer.
This is usually 6 months, but can sometimes be 3 or even 12 months depending on your seniority. Thomas V Farr
What is a non-solicitation agreement?
A non-solicitation agreement is crucial for employers to prevent employees from misusing sensitive information. By having them sign a non-solicitation agreement, the company can protect its valuable information, ensuring that employees do not exploit it for personal gain or to the advantage of competitors upon their departure.
What is a non-dealing covenant?
Non-dealing Covenant – 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.
What are non-poaching covenants?
The non-poaching restrictive covenants aim to stop you having contact with clients/customers/contacts of your employer, usually for a set period of time after you have left (usually for 3,6 or 12 months for more senior staff).
What is a garden leave clause?
Garden leave clauses are commonly used in conjunction with restrictive covenants for maximum effect.
The inclusion of a garden leave clause in a contract of employment allows an employer to require the employee to spend all or part of the notice period at home whilst continuing to receive their usual salary and benefits.
The benefit of a garden leave clause is that it prevents the employee from taking up other employment with a competitor. Whilst on garden leave the employee is also no longer privy to the company’s confidential information and what information they do have will become out of date.
In order to be able to place an employee on garden leave the employer will need to have an express clause in their contract.
CASE: William Hill Organisation Ltd v Tucker
Any such clause is subject to a test of reasonableness in relation to its duration.
Garden leave clauses allow the employer to specify than an employee must serve their period of notice at home, on full pay and benefits
