Employment Law- Restrictive Covenants (Post Termination Restriction), Breach and Garden Leave
In this article, our employment dispute lawyers explain the following employment law terms.
What is a Restrictive Covenant ?
A clause or set of clauses common in employment contracts to restrict the actions of an employee after termination of his/her employment.
When in an employment, it is likely that an employee may have acquired knowledge of the employers’ business operations, confidential information or other information that could give the employer a competitive advantage over their competitors. A departing employee looking to set up on his/her own or join a competitor could use the knowledge or information acquired to gain an unfair competitive edge to the detriment of his/her ex-employers.
As such, restrictive covenants are usually incorporated in employment contracts to protect an employer’s commercial interests from any such threat. Restrictive covenants are widely used in employment contracts for employees in a senior or executive roles and one that has a client facing.
These restrictive covenants are incorporated to prevent a departing employee from working for a competitor or setting up a competitive business for a duration of time after termination of employment; any such duration cannot be unreasonable.
Non-solicitation of clients
These restrictive covenants are incorporated to prevent a departing employee from having any contact/communication with clients or customers or contacts of the ex-employer for a duration of time after termination of employment; again, any such duration cannot be unreasonable. These restrictive covenants are usually in the form of a “non-solicitation” or “non-dealing” clause – the latter being more onerous as it restricts any conduct beyond soliciting.
These restrictive covenants are included to prevent an ex-employee from enticing or poaching key employees of the employer.
The general position is that post-termination restrictive covenants are void on public policy grounds as being in restraint of trade, unless they are being used by the employer to protect a legitimate business interest. To name a few, such interests include employer’s connections with their clients, suppliers and customers (including prospective ones), confidential information and trade secrets.
This is not to say that restrictive covenants will not be upheld by the courts. Whether restrictive covenants are enforceable will always depend upon the factual circumstances of the case. The following principles are usually taken into account:
- Is the employer trying, by way of the restrictive covenants, to deny an ex-employee the right to make a living in their chosen industry or profession?
- Are the restrictive covenants more restrictive on the ex-employee than is reasonably necessary in the particular circumstances to protect the employer’s business?
- Does the employer have a legitimate business interest which requires protection?
- Are the restrictive covenants reasonable in the particular circumstances to protect the employer’s business?
If the employer has reason to believe that an ex-employee has breached the restrictive covenants, the employer may sue the ex-employee for breach of the employment contract and seek damages for the breach. In such circumstances, the employer is required to show that loss had been suffered by the employer from the breach; such losses will usually be loss of profits on contracts or opportunities diverted by the employee.
The employer may also seek for an injunction against the ex-employee to stop the further commission of the activity prohibited by the post termination restrictions.
Garden leave allows an employer to require the employee to spend all or part of the notice period at home whilst continuing to receive his usual salary and benefits. Garden leave is commonly used in conjunction with restrictive covenants for maximum effect. Employers include a garden leave clause in a contract of employment to protect their interests; as such a clause, prevents the employee from taking up other employment with a competitor, access to office email, business details and information, office premises and property issued by the employer.
In order to be able to place an employee on garden leave the employer will need to have an express clause in their contract and such a clause must be reasonable in the prevailing factual circumstances.