Restrictive Covenants Part 1: Restraint of Trade Clauses
Introduction
Restrictive covenants are clauses, which have the effect of preventing one party to a contract from doing something, which they would otherwise be perfectly entitled to do.
In this blog, I am going to focus on the restrictive covenants known as “restraint of trade” clauses, which are typically inserted into employment contracts or contractor service agreements. Restraint of trade clauses are normally structured to prevent an employee or contractor from (a) working for a competitor (or maybe a customer) of the Company; and/or (b) competing with the Company and/or (c) persuading existing staff to jump ship and work with them in a competitive enterprise.
Restraint of trade clauses normally apply both during the contract term and for a period of time post termination. With some limited exceptions (eg zero hours contracts in the UK), it is typically quite acceptable to restrict competition with the Company during the contract term. What is legally more controversial (and therefore requires more care in drafting) is using a restraint of trade clause to restrict what an employee or contractor does AFTER their contract with the Company ends.
The English law starting point for a restraint of trade clause is that they are all presumed to be unreasonable and unenforceable against their target. It is for the Company to demonstrate in each case that a restraint of trade clause does all that is required and no more than is required, to give appropriate and proportionate protection to the Company.
The first piece of advice in this blog therefore is DON’T re-use a template restraint of trade clause in an un-thinking way for all or a class of employment/contractor agreements. Think about the following areas and structure your restrictive covenants in a way, which is most likely to ensure that a court or other tribunal will recognise them.
What kind of threat does this person pose?
When drafting a restraint of trade clause, you need to think about what kind of a threat the relevant individual is likely to pose to the Company following termination of their contract with the Company. If the individual is a sales director, who was party to all the Company’s strategic business plans, it may well be reasonable to restrict them for a period of time post employment, from setting up in competition to the Company or working for a key competitor. If there are a handful of specific key competitors, then it may be sensible to name them. It may also be reasonable to use a restraint of trade clause to stop such a key individual from contacting existing or known prospective customers of the Company, or from enticing your other employees to “jump ship”.
If the individual is an administrative assistant, on the other hand, no restraint of trade clause is likely to be reasonable or enforceable except in the most extraordinary of circumstances. For other employees/contractors between these two extremes, think carefully. It would not be deemed to be “harmful” to the Company in a legal sense if a good employee left and went to work for a competitor. The Company would need to show genuine commercial threat over and above the loss of that good employee.
Geographical Scope
If your business is a hairdressers in a small market town, it may be reasonable to draft your restraint of trade clause to prevent your best stylist from setting up in competition to you within that town or (perhaps) within a three or five mile radius of your current location…..but what if you are global business? A global restraint of trade is not typically going to be effective. Think about the countries in which your key revenues are located or about the markets the individual was principally engaged with, and structure your restraint of trade clause with reference to those considerations.
Time Restrictions
It is tempting to try and put a long temporal restriction into a restraint of trade clause, but bear in mind that longer than twelve months will almost never be considered reasonable under English law, and that even twelve months may be held to be unreasonable, depending on the nature of the threat level posed by the individual in question.
Cold Hard Cash
If you are trying to enforce a restraint of trade clause, which would prevent someone from working in their chosen field for a period of time after they cease working for the Company, then it is prudent to consider consideration (money) in exchange for the restriction. A typical and effective approach would be to have the right to put someone on garden leave for the term of the restraint of trade clause, and pay them their salary or a significant proportion of their salary during that period. You would still need to be mindful of whether the underlying restraint of trade itself was reasonable, and you may also still need to consider issues of unreasonably de-skilling someone by effectively forcing them not to work for a period of time, but the application of money in consideration of a restraint of trade clause is always worth thinking about.
If you would like assistance drafting a restraint of trade clause for an employment contract or contractor agreement, please contact [email protected].