Restrictive Covenants (‘covenants in restraint of trade’)
- Preventing ex-employees from setting up in competing business, OR
- Working for a competitor
- A time period of one year or more can only be justified in exceptional circumstances.
- The area in which an employee is barred from working must be no wider than the area in which the ex-employer does business.
- The business from which the employee is barred must be no wider than the business in which he was employed.
- Approaching ex-employers’ customers
- Preventing former employees from working for customers of ex-employer EVEN IF at the customers’ request. Just look at Manchester Taxi case.
- Preventing former employee from persuading current staff of former employer to follow employee to new employer.
- ‘Garden leave’
- A period of time for which the employee is paid but is required to stay at home, rather than attend work. Thus the employer can hold the employee to the terms of the contract and prevent him leaving to work for a competitor.
- NB If this is to be attempted there must be an express provision in the contract allowing it.
Restrictive covenants are prima facie void since they are a restraint of trade. However, the courts have held that some degree of restriction is permissible providing that it strikes a balance between protecting the employer and giving the employee freedom to work.
- A restrictive covenant can only be effectively imposed on an employee who has the required knowledge.
- The employer must have a legitimate business interest to protect, which “if disclosed to a competitor, would be able to cause real or significant damage to the owner of the secret which the owner had tried to limit dissemination of” Lansing Linde Ltd v Kerr .
- The terms of the restraint must be reasonable in;
- Restriction of activity, AND
- Time period, AND
- Geographical extent
- The terms must be sufficiently clear as to be generally understood.
If the clause is in restraint of trade it is void and unenforceable. If the clause is drafted too widely, the court may apply a ‘blue pencil test’ and sever the part of the clause that is too restrictive and leave the remainder as an enforceable clause.
- NB the court cannot rewrite the clause.
- NB2 In cases of wrongful dismissal, the court will not enforce the restrictive covenants although implied confidentiality may survive.