Restrictive Covenants and Injunctions

Restrictive covenants or non-compete clauses are clauses in employment contracts that restrict what an employee can do after leaving employment. They commonly include non-competition, non-dealing and/or non-solicitation clauses in respect of both clients and key employees.

Restrictive covenants may amount to an unfair restraint of trade so they are only enforceable if they go no further than protecting the employer’s legitimate business interest. Blanket bans on working for a competitor are less likely to be enforced than time-limited focused restrictions on contacting or working with key clients. For this reason, it is important that restrictive covenants are bespoke – drafted after understanding the employee’s role and how they might be able to damage the business after leaving.

Provided that there is no breach of contract by the employer, restrictive covenants can still apply in a redundancy situation. The question is more one of practicality: if the work the employee did is no longer done by the employer, there will be little commercial incentive to enforce a non-competition covenant. Conversely, if employees are made redundant when a business is struggling but it is trying to retain key clients, the enforcement of restrictive covenants could be essential to its survival.

Many employment contracts contain the right to place an employee on garden leave, which is often used when they give notice that they are leaving for a competitor. Restrictive covenants can be used in conjunction with garden leave, but they are more likely to be enforced if the time period is reduced by the amount of time spent on garden leave when the employee is not able to contact key clients and staff.

If the employer breaches the Contract of Employment, any restrictive covenants fall away and can no longer be enforced. This applies in the case of constructive dismissal. It is not uncommon for an employee in breach of a restrictive covenant to allege constructive dismissal as part of a defence to injunctive proceedings. The courts would look at that claim on its merits before determining whether there had indeed been a breach of contract by the employer before confirming whether or not the restrictive covenants should be enforced.

It is common for a Settlement Agreement to confirm that the restrictive covenants in the Contract of Employment will remain in force. This serves two purposes: reminding the employee that they exist and ensuring they have opportunity to seek independent legal advice about them when they take the Settlement Agreement to a Solicitor. Whilst the position at the time the restrictive covenants were included in the Contract of Employment is the relevant consideration for the courts, the fact an employee had independent legal advice and confirmed agreement to restrictive covenants can be a factor in determining whether they should be enforced.

Before commencing injunctive proceedings, it is usual to write to an ex-employee suspected to be in breach of restrictive covenants to seek undertakings that they will cease the activities said to be in breach. Failing to do so can prevent recovery of legal fees. Obtaining an undertaking can be as effective as an injunction: an employee will be advised that there can be serious consequences for breaching an undertaking so is unlikely to agree to give undertakings s/he is planning to ignore.

Although the usual remedy for enforcing restrictive covenants is an injunction to prevent further breach, sometimes the damage is already done. In such cases, it is possible to seek compensation for lost profits as well as or instead of an injunction to prevent further breaches.

A springboard injunction is used when employees have used confidential information to gain a head start in a competing business. It can be sought whether or not that employee has restrictive covenants against competition provided that there is breach of duty regarding confidential information. Employees can be required to account for profits earned because of that unfair head start as well as being injuncted from further use of confidential information.