Restrictive Covenants

Question 1

Employers sometimes try to prevent employees from working for competitors by use of a restrictive covenant.

On the face of it, these clauses are void because they affect the employee’s ability to obtain an other job and earn money.

Answer 1

Restrictive covenants can be enforced if the employer has a

LEGITIMATE BUSINESS INTEREST TO PROTECT

and the clause is felt to be reasonable

(see Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd (1894)

Question 2

How does a court decide reasonableness in a restrictive covenant?

Answer 2

In deciding reasonableness, the court will look at:

1. Duration
2. Geographical Area
3. Type of work the clause prevents the person from undertaking

Fellowes v Fisher (1976)

In this case, a restrictive covenant restricted a conveyancing clerk from working in the “legal profession”. This clause was deemed to be too wide.

Question 3

When does the reasonableness of a restrictive covenant get decided?

Answer 3

Usually, the reasonableness of the covenant is determined at the time the employee enters into the contract, and not what their position is at the point employment terminates.

However, in some cases the court can take account of the parties expectation sin respect of future promotions

(see Egon Zehnder Ltd v Tillman (2017).

Question 4

Is a restrictive covenant enforceable if the employee is unlawfully dismissed?

Answer 4

No, if the employer has unlawfully dismissed the employee, the employer cannot relay upon the covenant.

(see General Billposting v Atkinson (1909)

Question 5

What are the different categories of restrictive covenants?

Answer 5

1. Non-Competition clauses
2. Non-solicitation clauses
3. Non-poaching covenant
4. Non-dealing covenant

Question 6

Non-Competition clauses

Answer 6

Non competition clauses prevent an employee from working for a competitor or setting up a rival business in competition with the employer.

In Thomas v Farr plc (2007), the Court of Appeal stated:

1. an employer needs to show only that the nature of the employee’s employment was such that the employee would be exposed to trade secrets/equivalent confidentiality.
2. if it is difficult to determine what information remains confidential after employment ends is not fatal to the enforceability.
3. In practice, if information is difficult to determine what remains confidential, gives support to the reasonableness of a non-competition covenant.

Question 7

Non-solicitation covenants

Answer 7

Non-solicitation covenants prevent employees from soliciting business from clients of their former employer.

They may be enforced to prevent the solicitation of clients who were clients at any point during their employment, not just at the date of termination.

A non-solicitation clause that tries to prevent solicitation of future business will not be reasonable and therefore not enforceable.

Question 8

Non-poaching covenants

Answer 8

Non-poaching covenants prevent an employee form luring other employees to either their new employer or business.

In order to be enforceable, on-poaching covenants have to be narrowly drafted so that they are applicable only t those employees who were colleagues of the ex-employee at the same time, and who have some kind of specialist or technical knowledge or importance to the business.

Question 9

Non Dealing Covenants

Answer 9

Non dealing covenants are even more restrictive than non-solicitation clauses.

• They prohibit an employee from soliciting clients from their employer after their employment has ended, and
• they prohibit the employee from working for them/selling to them if the client approaches the former employee without solicitation.

Non-dealing covenants will be enforceable only if they go no further than is necessary to protect a LEGITIMATE BUSINESS INTEREST.