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Topic: Contractual clauses

restrictive covenant clauses
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Restrictive covenant clauses

Restrictive covenant clauses

We recommend that most employers use a restrictive covenant of some description for senior or key employees. However, ensure you carefully tailor them to the particular needs of your business and the role that the employee carries out. Don’t be tempted to adopt a “one size fits all” approach.

A protectionary measure

Restrictive covenants enable you to protect your business interests by effectively obtaining a covenant from the employee which restricts their activities after termination of employment. Our Restrictive Covenant Clauses include six different types - two covering during employment and four covering after employment - so you need to choose which is most appropriate and amend them accordingly.

Enforceability

Whilst restrictive covenant clauses can be very valuable, they will, however, only be enforced by the courts if you can demonstrate that they are both reasonable in scope and necessary for the legitimate protection of your business. The greater or wider the restriction, the less likely you’ll be able to enforce it. Also, think carefully about whether you’re really protecting a legitimate business interest or seeking to punish an employee who goes to work for a competitor. The court will balance the effect of the restraint on the employee against your need to protect your business. The issues you are usually seeking to protect are your trade connections, customers, clients and your current workforce.

A tailored approach

Draft the clause to suit the specific circumstances of the company and the employee. Start by assessing the potential risks to the company of the employee’s departure. For example, it may be necessary to protect your legitimate business interests to prevent the employee from working for a competitor in a particular geographical area.

Alternatively, particularly where the employee has good customer or client contacts, a covenant which prevents them from soliciting business from your customers or clients, or from dealing with your customers or clients, may be considered more appropriate, but it will need to be confined to those customers or clients with whom the employee had personal and material dealings. A clause which prevents a director or employee from poaching other members of staff (is there a risk that the employee will take their team with them?) is most likely to be enforceable if limited to employees with a particular level of seniority or set of skills and with whom the employee regularly had personal and material dealings in the normal course of their duties.

Where an employee is subsequently promoted, review the restrictive covenants to ensure they are still fit for purpose, taking into account the new job role and seniority. Always ask the employee to explicitly confirm their continued or fresh agreement to the covenants.

 

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