It is quite common for many businesses to now include restrictive covenants in their employment contracts. Here is all you need to know about what they are and how they work.
What is a Restrictive Covenant?
‘Restrictive’ is given its ordinary meaning, to refrain. ‘Covenant’ means a promise or an agreement. Therefore a restrictive covenant is a promise to refrain from doing something. In relation to employment, an employee will be refrained from engaging in any action that negatively impacts the legitimate interests of their employer. More specifically, a restrictive covenant in a specific promise that the employee will not disclose confidential or valuable information obtained in their employment. In other words, any confidential information gained in employment will be prohibited from being disclosed to the public. There are many different types of restrictions employers can place on their employees.
It is important to note that restrictive covenants in employment contracts can have many different names, including: restraint on trade clauses, restraint clauses or non-compete clauses. However, they all have the same meaning; a promise to protect the business interests of their employers.
Purpose of Restrictive Covenants in Employment Contracts:
Their main purpose is protection. They protect the legitimate business interests of the employer. However, there are limits on the extent of their protection. Therefore, these covenants will only be enforceable where the protection is necessary to actually protect the employers business interests. In other words, if the restrictive covenants actually work to protect the employers legitimate business interest, it is likely they will be legally enforceable. If not, it is unlikely the the Courts will enforce them.
Are all Restrictive Covenants Legally Enforceable?
Many employment contracts will expressly include restrictive covenants into the words of the contract. If they form part of the words of the contract, employees must abide by them. However, just because an employment contract contains restrictive covenants, does not automatically mean they are legally enforceable. This is something for the Court to decide. Thus, even if an employment contract has restrictive covenants, they may not necessarily be enforceable. The Courts decision will depend on the type of employment, role/position and the words of the contract itself.
Example
Jack holds a position of high seniority in a company. Jack deals with the finances of the company, conducts business deals on behalf of the company and can access the information of customers on the company database. As expressly stated in his contract, Jack cannot engage in competition and/or solicitation. Of course, more information about Jacks employment will need to be provided. However, it is likely that the Court will determine a restrictive covenant exists, and is legally enforceable.
Types of Restrictive Covenants in Employment Contracts:
The following 3 covenants are the most common covenants in the employment context:
Non-Competition Covenants:
This type of restrictive covenants prohibits former employees from working for competitors or setting up a competitive business. A ‘competition’ or being in ‘competition’ simply means that the new employment or business is in the same field of business and is a rivalry business of the former employer. Therefore competitive businesses will usually sell or offer the same products or services. Non-compete restrictions can apply both during employment and also after employment has ended.
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However, this restriction to not compete with the former employers business does not last forever. The period of restriction can only apply for a reasonable period of time after employment has ended. However, determining what a reasonable period is depends on the circumstances in question. For more information regarding non-competition covenants, see ‘5 Things To Know About Non-Compete Clauses‘.
Non-Solicitation Covenants:
Non-solicitation refers to the ban on former employees from taking away the employers customers/clients/suppliers. In other words, an employees cannot remove or poach clients from their former employers business. This type of covenant is also known as the non-poaching covenant. For more information on non-solicitation, see ‘How Do Non-Solicitation Clauses Work?‘.
Confidential Information Covenants:
Confidential information is any information that is not available to the public.If an employee is in a position where they deal with confidential business information, it is common for this information to be protected via a restrictive covenant. This is simply means that the disclosure of certain information is prohibited. This may included:
- Trade secrets,
- Scientific formulas,
- Software programs,
- Plans, projects and inventions,
- Customer names.
Many employment contracts have seperate agreements relating to confidential information, called non-disclosure agreements. To learn more about confidential information covenants and agreements, see here.
Final Thoughts:
Many types of employment will use restrictive covenants to protect their business legitimate interests. They are an extremely useful tool. They can be very important for businesses, especially if an employee holds a position of high seniority or deals directly with the business interests. Covenants relating to non-competition, non-solicitation and confidential information are the most common forms of restrictive covenants. However, it is important to remember that just because an employment contract contains a restrictive covenant, does not automatically mean it is legally enforceable. This is a question for the Court to decide.
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