UK Restrictive Covenants: An Overview
Restrictive covenants in the UK prohibit ex-employees from misusing the confidential information of their previous company, at the cost of their former employer, to profit themselves. Any employer who wishes to hire in the United Kingdom should be aware of these covenants to safeguard their business interests.
TYPES OF RESTRICTIVE COVENANTS
The employee protection laws in the UK are strict and often favorable to workers. But employers can take steps to protect their interests by including restrictive covenants in employment contracts when hiring. These steps are listed.
- Non-compete: Restrictions on setting up a competitor business with the help of confidential information (such as know-how and pricing structures).
- Non-solicitation: Restrictions on contacting current or prospective business clients whose name may not be mentioned.
- Non-dealing: Restricts former employees to strike deals with business clients and contacts, regardless of whoever initiated the contact.
- Non-poaching: Restricts an ex-employee to influence former colleagues from joining their new business that competes with the organization they left.
- Garden Leave: Allows the employer to send an employee who has given notice to a “garden leave,” preventing their interaction with clients, contacts or other employees.
Except for garden leave, the usual duration of restrictions imposed on ex-employees by these covenants extends from 6 months to a year.
ENFORCEABILITY OF RESTRICTIVE COVENANTS
Employees are inclined to take the restrictive covenants lightly as they feel these covenants are not easily enforceable. To a large extent, this is because UK courts do not interpret the restrictive covenants based on their literal sense.
Restricting former employees to engage in business activities goes against the public policy of trade freedom, so when evaluating whether a covenant is enforceable, the courts factor in two things. One, whether the employer has a proprietary interest that merits protection and two, whether the restrictions hamper the interests of the concerned parties and public interest.
When any part of a restrictive covenant goes against what the court holds to be reasonable and necessary, often the entire covenant is declared void. Therefore, it is imperative to leverage legal counsel in drafting bespoke covenants in an employment contract, instead of relying on a fixed template.
VALID AND ENFORCEABLE RESTRICTIVE COVENANTS
- Covenants that restrict the activity of former employees are more likely to be valid and enforceable when they meet the following guidelines:
- Were signed by both the employer and employee before the employee’s first day at work.
- Are reasonable in their extent of duration and geographic coverage and do not hamper the ex-employee from making a living.
- Protect the business from future risks by safeguarding its legitimate interests. The employer is under the burden of proof to validate this.
- Restrict senior professionals of the business in critical roles that involve interaction with clients and other important contacts. A covenant is more enforceable when it is clear the employee indeed possesses critical information.
- Were reviewed and revised after the promotion of the employee from a subordinate role to a supervisory or managerial role. The covenant that was meant for a subordinate position would be evaluated on its validity pertaining to that position, not the current position of the employee.
- Are in a deed rather than an ordinary contract and explains the benefits that the employee is receiving by agreeing to the covenant. The benefits should be more than the regular benefits an employee receives.
- Are a part of the shareholder agreements or share plan documentation in case the employee is a shareholder.
The UK does not allow long restrictive durations on any condition – even if the employer is ready to compensate the employee during the extended period of restriction. If inadequate provisions in your current employment contract is your concern, you can consider the following to circumvent this problem:
- Negotiate new restrictive covenants with your current employees that are more likely to be effective; even as part of their exit plan if they give notice.
- Use garden leave and confidentiality terms of your employment contract to prevent compromise of critical knowledge or information.
- Be in touch with the leaving employee and clients or contacts they were handling to encourage loyalty for your business.
The legal principles that pertain to restrictive covenants in the UK have not changed over the years, but their enforceability has always depended on the interpretation of facts in every case. The restrictions need to be very carefully articulated, taking into consideration the unique circumstances of your business, for them to be deemed valid in a court of law.
Learn more about Global Upside’s international expansion, accounting, payroll, human resources or talent acquisition solutions. If you have any questions about hiring in the United Kingdom you can reach out to us.