Restrictive covenants

If an employer wants an employee to be bound by terms after their employment has ended, for example, to restrict who they can work for or to protect confidential information, they must include a specific term in the contract, sometimes called a restrictive covenant.

There are limits on the extent to which an employee can be bound by a restrictive covenant. A clause that is a restraint of trade is unenforceable, but a clause that protects an employer’s legitimate business interests is likely to be allowed.

A restrictive covenant will only be enforced if it is reasonable. This will depend on:

• the extent to which it tries to limit the employee’s activities;

• the geographical area covered; and

• how long it lasts for.

If a term is too wide it will not be enforced:

The Court of Appeal ruled that a clause preventing an employee from working in any capacity in any business within the UK for anyone who was in competition went beyond what it was legitimate to protect and was unenforceable (Wincanton v Cranny [2000] IRLR 716).

The Court of Appeal held that a clause entitling an ex-employee to receive commission payments as long as he did not work for a competitor for a year was an unreasonable restraint of trade (Marshall v NM Financial Management [1997] IRLR 449).

Employees who are dismissed in fundamental breach of contract (see Chapter 10: Dismissal) are released from their obligations under that contract. This means that any restrictive covenants (other than in relation to the duty of confidentiality) cannot be enforced (Rock Refrigeration v Jones [1996] IRLR 675).

Even if a restrictive covenant is valid, an employer wishing to rely on it must still show that a breach will do it some harm. In Jack Allen (Sales & Service) Ltd v Smith ([1999] IRLR 19), the Court of Session refused to enforce restrictive covenants because the employer was unable to identify any real loss.