Restrictive Covenants In Employment Contracts

What are Restrictive Covenants?

A restrictive can be defined as the contractual clause that restricts the post employment service of the employee for a restricted period following the end of the employment service so that the employer can safeguard the legitimate business interests. Employers impose restrictive covenants on employees because employees may acquire information that are confidential and may gain knowledge of significant business interest (Satter, 2016). These includes information regarding the identity of the customers, requirements of the clients and pricing supplies, knowledge regarding the workforce and information concerning future business strategies at the time of the employment. It is often alluring for employees to make use of this information following their employment has ended either in their business or in their own account to hamper the interest of the new employer who might be the competitor.

Employers impose restrictive covenants on employers with the objective of protecting their businesses from threats after incorporating post termination restrictive covenants into the employment contracts. The effectiveness of such kind of restrictive covenants is dependent on the delicate balance between the rights of the employers to safeguard the legitimate business interests along with the rights of the individuals to make use of their skills for their own benefit. It might be legitimate to prevent the employee from encouraging his or her former colleagues to join them at their new employer or in their new business venture.

In practice most employers prefer to include complete range of non-compete, non-dealing and non-solicit clause in the contracts (Gonda, 2015). The restrictive covenants can be of different lengths or coverage with non-solicit clause being less restrictive in nature, which may be enforceable for a longer period than the non-compete clause. Contracts of employment are not the only way of enforcing restrictions on the departing employees. Employers imposes restrictive covenants through deferred schemes of remunerations or share options and often more efficient methods of assuring that the employees does not breach their covenants.

A covenant, which is very wide than it forms reasonably obligatory to safeguard and protect the legitimate interest of business, is at the risk of, being enforceable. It is very important that the employers should carefully take into the considerations whether the covenant is narrower in scope that might yet protect the interest of the employers (Milgrim & Bensen (2016). As held in the case of Commercial Plastics v Vincent (1965) the court takes into the considerations the reasonableness of the covenant during those circumstances that is entered into and not at the time of enforcement.

Why Do Employers Use Restrictive Covenants?

Once the employer has conquer the obstacle of establishing that it consists of legitimate interest to protect, it is under the obligation to illustrate that the clause itself is not wider than reasonably necessary to safeguard the interest. Another method of describing this is that the restrain should be such that it does not afford no more than the sufficient safeguard to party in whose favour it is applied. It is worth mentioning that the reasonableness of the restrictive covenant should be determined by the reference in accordance with the circumstances of the parties at the time of entering into the covenant. In other words, covenant is required to be reasonable from its beginning.

Another factor, which is required to be taken into the considerations at the time of assessing the reasonableness, is the relative strength of the bargaining position between the parties (Flynn, 2014). The more junior is the employee the more hard it might turn out to justify a restraint. On the other hand, where more senior is employees that may have negotiated their contracts based on individual terms, they are more likely to held their contracts.

The real key of reasonableness is to make sure that the rights of the employer are safeguarded by drafting restrictions in an effective and reasonable manner in order to make the enforcement options available. It is prudent to reassess the restrictions which is applied on the employees constantly especially when they are promoted to make sure that the remain appropriate and adequate to keep the organization safe.

Solari Industries v. Malady,

The chancery division has stated that the non-competitive provision in the defendant employment contract was void and hence, denied the plaintiff application for implementing an interlocutory injunction against its breach (Lombardo, 2016).   

Aamco Transmissions v. Romano

The eastern district of Pennsylvania ruled in its judgement that noncompeting convent in a franchise agreement is enforceable however the former franchisee does not violates the rules since the business is located outside the geographical area where the covenant is applicable.   

Commercial Plastics v Vincent (1965)

It was evident from the authorities that the plaintiffs were not entitled to implement a restriction, which would prevent the defendant from using during the competition with the plaintiff skill and aptitude and general technical knowledge acquired by him during the employment, by the plaintiff.  

Thomas v Farr plc and another

The employee under the former chairman of the company bought a appeal on discovering that his contract is restricted being employed for a year in the similar field following the end of the termination which was valid and enforceable (Mead & Ryan, 2014).

Types of Restrictive Covenants

Bluebell Apparel Ltd v Dickinson SCS [1977]

The former employee under this case was challenged for a restriction on his post employment career. The restriction under this case was worldwide and unenforceable.

TFS Derivatives v Morgan (1991)

The claimant wanted to enforce a post employment restrictive covenant (Wiley et al., 2014). It is was ruled that the court cannot sever the portions of the restrictive covenants unless it is executed without changing the sense of the contract.   

Willow Oak Developments Limited v Silverwood

The employer appealed a finding that he acted unreasonably in seeking to vary the contract for employment of his staff by adding the post employment restrictive covenants and the consequent dismissals were considered as unfair. The court held that the process adopted was unfair.

Symbian Ltd v Christensen (2000)

The court under this case granted an injunction to the company by restraining Mr Christensen from undertaking or continuing with the employment by or the provision of advice at any time before 16^th September 2000, being the date of the termination of his employment. 

Office Angels Ltd v Rainer-Thomas CA ([1991]

The court under this case restated the principles that are applicable in testing whether an employee’s restrictive covenant was sensible (Craven, 2016). The court could not say that a covenant in one form affords not more than the adequate protection to the covenantee’s applicable legitimate.

 Intercall Conferencing Services Ltd v Steer QBD (Bailii, [2007]   

The claimant company under this case sought an interim injunction with the objective of preventing the defendant, a former employee from working for a competitor firm as the breach of clause in his contract and from revealing any confidential information (Selmi 2014).    

There is a general misperception among the practitioners that there prevails a bright line of rule preventing an employer from enforcing restrictive covenants against any of that employee that has been terminated involuntarily “without cause”. The general states that the restrictive covenants might be enforced against the former employee who is terminated without clause given that the employee has not breached the materiality of the contract that contains the restrictive covenant and if the covenant has passed the rest of reasonableness (Ash & Cheesman, 2016).

This test is traditionally implemented in those cases employees voluntarily leaves the employment and indulges in forbidden competitive activities. Post employment restrictive covenants are enforceable where the covenants are reasonable in agreement with the time, scope and geographical limitations that is necessary to safeguard the legitimate interest of the employer.

Reference List: 

Ash, A., & Cheesman, E. (2016). Employment: Post-employment restraint after repudiation of an employment contract. LSJ: Law Society of NSW Journal, (21), 76.

Craven, J. A. (2016). The Employment Relationship. NY Practice Guide: Business and Commercial, 4.

Flynn, J. (2014). Shelley vs Kraemer. Sat, 1, 48.

Gonda, J. D. (2015). Unjust Deeds: The Restrictive Covenant Cases and the Making of the Civil Rights Movement. UNC Press Books.

Lombardo, T. J. (2016). Unjust Deeds: The Restrictive Covenant Cases and the Making of the Civil Rights Movement. By Jeffery D. Gonda.

Mead, D., & Ryan, S. (2014, October). Restrictive covenants: is there a case for public plans to control private planning instruments in New Zealand. In New Zealand Planning Institute conference). Retrieved on (Vol. 9).

Milgrim, R. M., & Bensen, E. E. (2016). Use of agreements to protect trade secrets in the employment relationship (Vol. 2). Milgrim on Trade Secrets.

Satter, B. (2016). Jeffrey D. Gonda. Unjust Deeds: The Restrictive Covenant Cases and the Making of the Civil Rights Movement.

Selmi, M. (2014). Trending and the Restatement of Employment Law's Provisions on Employee Mobility. Cornell L. Rev., 100, 1369.

Wiley, M. B., Polsinelli, V. E., & Asheld, B. A. (2015). Restrictive Covenants. Journal of the American College of Radiology, 12(6), 645-647.