With a cost-of-living crisis and a buoyant hiring market in the U.K., many employees might take the opportunity in 2023 to leave their current employment for new positions. This means employers should pay attention to employees’ contracts and their restrictive covenants to protect the company’s business interests and confidential information.
“You want a comprehensive confidential information clause, which prevents an individual from using that employer’s confidential information after they leave,” said Charles Urquhart, an attorney with Clyde & Co in London. “It gives you more protection to stop employees leaving with your know-how and setting up in competition.”
Different Types of Common Restrictive Covenants
There are four standard kinds of restrictive covenants that prevent an employee from competing with a former employer. The most onerous is a noncompetition covenant, which prevents an employee from working for a competitor in a competitive activity for a set period.
For example, “if an executive sits on a board or is on a distribution list where trade secrets and confidential information are shared, the business should think about the risks of that person joining a competitor and whether a noncompete restriction would be appropriate,” said Peter De Maria, an attorney with Doyle Clayton in London.
Then there is a nondealing covenant, which prevents departing employees from interacting with clients, solicited or unsolicited. “That prevents the employee from either reaching out to clients or taking an active step to solicit them, or if a client rings up their employee, unsolicited, it stops them dealing with them,” Urquhart said.
The third type is a nonsolicitation covenant, which prevents the employee from reaching out to former clients but not the reverse. “That’s not as effective as a nondealing clause, which prevents any contact with the client, because it only prevents solicitation and is more difficult to enforce,” Urquhart said.
The fourth of the common restrictive covenants is a nonsolicitation of employees covenant, which prevents employees from poaching their former colleagues to join them at their new place of employment.
Employees may have multiple restrictive covenants in their contracts, depending on whether that’s appropriate for their position. “There needs to be some sort of thought there,” Urquhart said. “A CEO is going to have influence over all parts of the business, so it’d be entirely appropriate for that CEO’s contract to have all four of these standard noncompetes.”
On the other hand, “there may be a good number of employees, even a majority in some organizations, whose contracts do not include these clauses,” De Maria said.
Make Sure to Draft Restrictive Covenants Carefully
It’s important to draft restrictive covenants thoughtfully, as poorly written or overbroad restrictive covenants can be challenged in court.
“The courts don’t like restrictive covenants, because they’re contrary to public policy, and they’re in restraint of trade,” Urquhart said. “But the courts are prepared to make an exception and allow restrictive covenants and uphold them, where they are used to protect the company’s proprietary interests.”
Employers should give careful thought to the duration and scope of restrictive covenants. For the restrictions to work, they should not be too onerous or impose too many limits on the activities of former employees. The goal should be to protect a company’s legitimate business interests, such as confidential information, stability of the workforce and the client base; the goal is not to prevent all competition.
Restrictive covenants usually last for three, six or 12 months, and occasionally for 13 months, though the duration of the restrictive covenant should be tailored to the employee and their role.
“In order to make these covenants enforceable, they’ve got to be drafted no wider than is necessary to protect that particular interest, and that will depend entirely on what the employee does and how senior they are,” Urquhart said.
Noncompetes often have relatively short durations because they are so restrictive, and 12-month restrictive covenants will usually apply only to employees who are high up in the company and have had access to important confidential information, or who have had real influence over important clients.
Employees Should Be Aware
While employers need to think about the appropriate drafting and duration of restrictive covenants, employees should also pay attention to the impact of any restrictive covenants in their contracts.
“A lot of people get caught up in the excitement of a new job and don’t think about what happens if things don’t end as well as they would have hoped,” De Maria said. “It is sensible for employees to have a good look at what their contract says and also to take legal advice so that they understand how certain clauses may limit a future job search.”
Katie Nadworny is a freelance writer in Istanbul.