The future landscape of restrictive covenants: What employers should do to protect themselves

The future landscape of restrictive covenants: what employers should do to protect themselves

Tom Clarke, Associate, Employment Law & HR

Restrictive covenants have long been a staple in employment contracts. For most businesses they represent a legitimate tool to safeguard trade secrets, client relationships and confidential information all of which make a commercial entity unique and allow it to prosper in what is often a competitive commercial environment. However, attractive as they are, the enforceability of restrictive covenants varies significantly. In recent years, there has been a growing trend, driven by judicial consideration on the issue, towards limiting the scope and duration of these agreements. Not only are courts increasingly wary of covenants that overly restrict an employee’s ability to work and earn a livelihood but there have been government proposals to limit non-compete clauses to a maximum of 3 months; a timescale that is far shorter than most covenants anticipated. That is a direction of travel that most practitioners expect to continue over the coming years.

In England, the courts have traditionally upheld restrictive covenants, provided they are reasonable in scope and duration. What is reasonable is a highly subjective question and there is no definitive list of what the courts will weigh into their considerations when determining the question. In recent case law there is a marked shift towards more stringent scrutiny. Indeed, the new normal for restrictive covenants is for the courts to strike down covenants that are deemed overtly broad or are structured in a manner which is unnecessary to protect what they take to be the legitimate business interests.

Best practices for businesses

Given the uncertain future of restrictive covenants, employers should take proactive steps to ensure their agreements are enforceable and effective. There is no one size fits all approach to this but we consider the following to be increasingly seen as best practices:

1. Tailor covenants to specific roles: One-size-fits-all covenants are more likely to be challenged. Tailor restrictive covenants to the specific role and responsibilities of the employee. For example, a non-compete clause for a senior executive may be more extensive than one for a junior employee. Equally, don’t include them for all employees and consider approaching their use based on the impact that individual would have if they exited the business for a competitor.

2. Limit scope and duration: The trend for shorter restrictive covenants is only heading in one direction, so ensure that the scope and duration of the covenants are no wider than is strictly necessary and that you can be legitimately justified. Courts are more likely to enforce covenants that are narrowly tailored to protect legitimate business interests.

3. Regularly review and update covenants: It’s essential to regularly review as the business changes and especially when employees are promoted. Be aware that in some cases, continued employment may not be sufficient consideration for restrictive covenants so consider whether they should be tied to a promotion, pay increase or new benefit. When reviews take place, it is useful to document the thoughts and approach of the business.

4. Use confidentiality clauses: While non-compete and non-solicitation are harder to enforce and are only effective for a limited period, confidentiality clauses remain a helpful tool for protecting sensitive information. Ensure that employment contracts are reviewed and include robust confidentiality provisions and implement procedures to protect information when an employee says they are leaving. We would equally recommend that a business has a clear employee exit checklist which includes reviewing their access and use of company information and whether they have sent information to themselves for future use.

Summary

The future of restrictive covenants is uncertain, but there is no doubt that the direction of travel indicates even closer scrutiny and a likely limit on the use of non-compete clauses. It is, therefore, increasingly important to make sure that restrictions are reviewed and carefully considered. With Hay and Kilner’s experience in drafting and litigating restrictive covenant matters, we are perfectly placed to help protect your business.

For more information on restrictive covenants and their use, contact Tom Clarke.