It is possible to include a clause called a ‘restrictive covenant’ in an employee’s contract of employment to stop this happening (or at least provide an employer with a remedy if it does happen). However, this is a complicated area of law and careful thought needs to be given to what the clause says and it needs to be given to the employee at the right time.

This article sets out what a restrictive covenant is and what it can do. It also looks at the limitations on restrictive covenants and gives some guidance on when an employer should ask employees to sign restrictive covenants.

Many employers would love to stop ex-employees working in a competing business or poaching customers from them forever. Unfortunately, from an employer’s point of view, that is not possible. A restrictive covenant will only work if it is no wider than is necessary to protect the legitimate business interests of the employer. This requirement is why the law in this area can become complicated. Much court time is spent arguing over whether or not a restriction is too wide.

The first thing an employer needs to do is identify the legitimate interest it is seeking to protect. The only legitimate business interests the law lets you protect are:

• Trade connections (e.g. the relationships the business and its employees have with customers); and
• Trade secrets and confidential information.

If an employer tries to impose a restrictive covenant on an employee who doesn’t have access to customers (e.g. because they work in the back office) or trade secrets/ confidential information then the covenant will not be trying to protect a legitimate business interest and won’t work, i.e. the courts won’t enforce it and it won’t stop the employee pinching customers. This scenario may not concern an employer too much because after all, the employee would not have the relationships or the information to harm the employer’s business.

The second thing an employer needs to do when drawing up a restrictive covenant is to make sure it is no wider than is necessary to protect the business interest identified at the first stage. In practical terms this means that the restriction imposed on the employee should:

• Be for a limited time only depending largely on how long it will take for someone else in the business to establish relationships with the customers the departing employee dealt with. More than 12 months is rarely justified and a shorter period is preferable.
• Only apply in a limited geographical area; For example if a business has all its customers in Skipton a nationwide or worldwide restriction would be too wide to protect that business.
• For a non-solicitation or non-dealing clause, be limited to the customers the employee actually dealt with. If the clause just referred to all the customers of the business this would be too wide as it would stop the employee dealing with customers of their former employer they did not know or deal with.

An employer should think about restrictive covenants at the start of employment when an employee is first recruited. This is because a restrictive covenant should be in the employee’s contract of employment and this should ideally be given to the employee before their employment commences. At this stage the employee has little option but to agree because if they don’t sign the contract they don’t get the job. It is possible to ask employees who have been employed for sometime to sign new contracts including restrictive covenants and if the employee agrees the covenants will be enforceable. A problem arises when an employee refuses to sign. It is possible in the right circumstances to impose a restrictive covenant on an employee who refuses to sign but it is a complicated process that carries some risk so it is best avoided. It is far too late to try to impose a covenant when you suspect an employee is about to leave or when they have handed their notice in (although if an employee is leaving in circumstances where you are paying them some money and they are signing a settlement agreement it might be possible to negotiate and include a restrictive covenant in the settlement agreement).