Introduction

As we approach the men's football World Cup, what better time to discuss the importance of a strong defence? In this article, we do just that and, specifically, provide 11 fun facts about restrictive covenants (RCs) in employment contracts. 

RCs often appear in various documents, including shareholders' agreements. The main difference when including them in employment contracts is the inequality of bargaining power between the parties perceived by the courts, which makes them more difficult to enforce in the employment arena. Employers and employees are clearly not on a level playing field – think of a football match between a Premier League team and a non-league team.

Before we kick off, what are RCs? 

RCs are time-limited restrictions on former employees from using the knowledge, skills and competitive edge they have acquired from working for a company (Former Company) to that company's disadvantage. 

They may prevent such employees from poaching clients, other employees and suppliers (Contacts) from the Former Company, as well as working in competition against it. Their purpose is to protect the Former Company's proprietary business interests (PBI) such as connections with Contacts, goodwill, trade secrets, confidentiality and the stability of the workforce. They should not be used as a means of simply preventing the employee from working elsewhere or healthy competition (both of which are good for our economy).

1. Attack is not always the best form of defence

Including really restrictive RCs in an employment contract is fine if the sole purpose is to act as a deterrent to the employee breaching them. However, where it is important for the employer to be able to actually rely on the RCs to protect a PBI, the more restrictive the RCs, the less likely they are to be enforceable.

In addition, the more draconian the RCs, the more likely it is that the relationship between the employer and the employee will sour on the latter's departure, and the more likely the employee is to breach their RCs.

When using RCs, therefore, employers would be well advised to concentrate on defending the goal (the PBI) rather than purposely injuring a player in the opposing team (the departed employee). The latter may result in a red card (the RCs being unenforceable).

2. The reasonableness of RCs should be considered at the time the player enters into them 

When a new employee starts their employment, you would be forgiven for thinking that placing them on your strictest and most comprehensive template RCs is the best thing to do. They have been drafted by your lawyers, surely that is enough, right? Wrong! Yes, your lawyers will have done a stellar job of drafting some fantastic RCs, but this is a game of two halves and including great RCs is only half the battle. It is now down to the company to consider whether those RCs are both necessary and appropriate to the level/role of the individual.

Non-compete RCs are the most difficult to enforce because they prevent an employee from working for a competitor and may, therefore, effectively prevent them from earning a salary for the duration of the RC. They are, therefore, the RCs that will be scrutinised the most if contested.

3. RCs should be updated as the player moves up the league

One of the most common issues we encounter when an employer seeks to rely on a departing employee's RCs is a failure to update them as the employee has become more senior.

Take the scenario where an individual starts their employment, fresh-faced, straight out of school at the bottom of the food chain/league. Fast forward 15 years and the employee is now on the board of directors. They have RCs contained in their contract which were drafted by your lawyers and they are therefore very, very good. The problem here is that the enforceability of RCs is judged at the time they were entered into (i.e. the question that will be asked is whether they were appropriate at the time the employee signed up to them). If they have never been updated, no matter how watertight they may appear, they are unlikely to be of any use if this individual decides to leave.

RCs should be reviewed regularly as and when employees move up the league (become more senior). A good time to ask an employee to enter into new RCs is, therefore, when they are promoted and/or given salary increases.

4. The length of the RCs should be reasonable

Employees should only be restricted for as long as necessary to protect the relevant PBI. If they have access to confidential information, thought should be given to how long that information will last before it goes out of date. Particularly with non-compete RCs which are the most difficult to enforce, the aim should not be to keep the individuals out of work.

A good rule of thumb to ensure, as far as possible, the enforceability of your RCs is to think about the minimum amount of time necessary to protect the business interest in question. There are no hard and fast rules or set periods which will guarantee enforceability. This will depend on each situation. However, generally speaking in the UK, it is rare to see RCs which last longer than 12 months in employment contracts, even for the most senior employees.

Another point to note is that if an employer tries to enforce RCs by way of injunction proceedings, the referee (judge) does not have the power to reduce the length of the RC to make it more reasonable. If it is unreasonable, it will simply be unenforceable – there are no yellow cards, this is a straight red offence.

5. Any period of garden leave should be deducted from the length of the RC

Garden leave essentially has the same purpose as RCs (i.e. to protect the company's PBIs). However, it applies during an employee's notice period and the employee therefore continues to be paid through it. In football terms, the employee is benched.

It is a very powerful tool because it allows an employer to physically remove an employee from the business whilst they serve their notice. As the employee is still employed, the company has more control over them. It is therefore a win-win situation which allows the company to protect its information and connections whilst the employee is paid to do nothing.

It is, therefore, usually important to reduce the length of the RCs by any time spent on garden leave, because it is likely that, when added together, the period of garden leave plus the length of the RC would make the RC unreasonably long. 

6. The different RCs should only be used in appropriate situations 

Employers should not include the full team (suite) of RCs for all their employees. This is because some RCs will not be appropriate for all employees and, as explained above, if they are not appropriate to the employee, they will not be enforceable. For instance, it would likely be inappropriate to include a non-compete RC in the contract of an employee working in the post room. Such employee should be able to work in any post room for any business without causing damage to the Former Company. A confidentiality provision should be more than sufficient to protect the Former Company's PBI.

It is much better to consider each RC as a layer of protection and to build up these layers depending on the seniority of the employee and the influence they are able to exert. For example, it may be sufficient to include:

• a non-solicitation of employees RC for a junior, non-client facing administration clerk;
• non-solicitation of employees, non-solicitation of clients and non-dealing RCs for a mid-level employee with a client-facing role; and
• both the above RCs and a non-compete RC for a very senior employee with lots of influence.

Having said this, the appropriateness of RCs is dependent on the factual matrix and, just because they are appropriate in one scenario, does not mean they would be in another.

7. RCs should always be signed by employees

RCs should always be signed by employees to show they were agreed to, something which will be essential if the Former Company wishes to rely on them if they are ever contested. By far the simplest way to show RCs were agreed to is to produce a signed copy. The argument that the employee continued to work under an unsigned contract and therefore impliedly agreed to the RCs is unlikely to be effective when it comes to enforcing them.

It may also be advisable, in situations where the employee's compliance with RCs is especially important, for an employer to ensure that the employee received separate legal advice on the RCs and it can be helpful to pay for at least a proportion of this advice. The fact that the employee received such advice should be included in the wording of the RCs. This should decrease the risk of an employee complaining that the RCs were unreasonable down the line, especially so if there was an element of negotiation between the employer and employee which would redress the inequality of bargaining power to some degree. This may not always be feasible and would usually only be considered for the most senior employees.

8. Paying for RCs may become more common

Whilst we do not really see the concept of paying for RCs in the UK, this may be set to change. The government has started a consultation on providing mandatory compensation for the duration of the RCs and considering statutory limits on their length.

Imposing some regulation would be helpful for both employers and employees as it would provide some much-needed certainty on the enforceability of RCs and so reduce the need to enforce them in the courts, which is very costly and time-consuming.

There is not yet a response to this consultation but we will keenly follow any developments. So watch this space.

9. Employers should apply their minds to the necessity and length of each RC in respect of each level of employee

Having template RCs is a good idea, but it should only be a starting point. If the RCs are ever contested, it will be for the company to show that the RCs were reasonable in the circumstances. If exactly the same RCs have been applied to all employees for exactly the same amount of time, it will be difficult to show that the company really applied its mind to the type and length of the RCs needed in each case.

Thought should therefore be given to whether each RC is needed and, if so, the length of time for which it should be applied, in respect of each level of employee.

10. RCs should be clearly written

Whilst this may seem obvious, it is essential to ensure that RCs are clear. If they do not make sense, they will not be capable of enforcement. When interpreting the true meaning of an RC, case law has held that it is necessary to look at the meaning which a person with all the relevant background knowledge would give to that RC. Context is key and words will be interpreted differently depending on the situation.

RCs that are defective are likely to be struck out. The referee (judge) will not look at what the employer meant to say, but rather apply a literal interpretation to the wording of the RC, taking into account the relevant context.  

11. RCs should not be drafted too widely

RCs should be drafted as narrowly as possible to protect the relevant PBIs and to avoid scoring an own goal. RCs that prevent a former employee from being involved "in any capacity" in a business which competes with the Former Company may not be enforceable where thought has not been given to the meaning of the word "capacity" and any exemptions that may be necessary.

The word "capacity" should therefore be carefully defined with appropriate exemptions. It is standard practice to exclude from the RC minor shareholdings in a competing business, working in a geographical area in which the Former Company does not operate and working with a competitor in a wholly different role to that which they had whilst in the Former Company's employment. This is especially important if and when it becomes necessary to enforce the RCs because any such exemptions will not be implied into the RCs to make them enforceable. In addition, whilst the courts can, in limited circumstances, ignore some words from RCs to make them narrower (subject to the amendments not changing the overall effect of the RCs), they cannot add words or change the remaining words.

Therefore, it is advisable, once your RCs have been drafted, to think about whether you can limit the RCs in any way. Really honing in on what you are trying to protect, and limiting the RCs to that, will greatly increase your chances of enforcing them. 

Conclusion

RCs are very useful tools to protect a company's PBIs. They should, however, be carefully considered and drafted to maximise their chances of enforceability. Viewing them as the goalkeeper rather than an attacker should help to hone in on the relevant PBIs and draft them in a way that goes no further than necessary to protect those PBIs.