All businesses, regardless of size or trade, rely on privileged information. Restrictive covenants are utilised when a company needs to protect knowledge deemed exclusive to that business. Employers frequently include restrictive covenants in employment contracts in order to ensure that employees do not share private information, often regarding strategy or trade secrets, with entities outside the company. A former employee with inside knowledge of a certain company would be a tempting candidate for a position at a rival company. In this case, restrictive covenants forbid an ex-employee from competing with his former employer after leaving the business, or from sharing his or her privileged knowledge with competitors or customers in that industry. Employers may also use restrictive covenants while the employee is still active within the company.
A restrictive covenant is enforceable only if an employer can establish it as necessary to protect his or her business interests, and as limited to what is needed to protect those interests. An employer must also prove their restrictions are reasonable and do not extend to a time period longer than what is needed. There are multiple types of restrictive covenants, including non-competition covenants, non-solicitation covenants, non-dealing covenants, and non-poaching covenants. These covenants can accomplish a myriad of functions, such as barring the employee from soliciting clients, forbidding the use of confidential information, or prohibiting the poaching of employees from the company.
An employer wishing to draft a restrictive covenant must be aware of several key elements. These clauses are extremely limited in nature; as such, covenants must be mindful of reasonable time limits and even geographic restrictions. Restrictions must only apply to relevant information, and the relevance of this protected knowledge must be justified by evidence. Additionally, employers are not permitted to restrict a former employee from utilising his or her skill or personal knowledge within the industry. They cannot, essentially, “ban” a person from operating in his or her respective field.
One common element when considering a restrictive covenant is a garden leave clause. This clause requires an employee to stay home during his or her notice period; the employee receives his or her standard salary, but is prevented from dealing with competitors or stockpiling privileged information before his or her departure from the company. A garden leave clause must be expressly mentioned in the employment contract, and must not extend for an unreasonable period of time. Additionally, restrictive covenants are not enforced if the employee is subject to unfair dismissal or a breach of contract; however, they are enforceable if the employee resigns from his or her position.
An employer may seek an injunction against an employee suspected of breaching his or her restrictive covenant. If the court agrees that there is a risk to protected information, they may issue an interlocutory injunction and request that the employee deliver any confidential information. Employers occasionally choose to seek damages for the breach of a restrictive covenant. This can sometimes be difficult, as an employer will have to prove there was a loss resulting from the breach and assess damages for unquantifiable opportunities. However, the courts do consider financial losses due to an employee’s breach of his or her restrictive covenant.
Restrictive covenants must be handled with extreme care and precision; they will not be upheld unless it is clear they do not restrict anything more than what is needed to protect professional interests. As such, the drafting of such a clause should not be handled lightly, and “cookie cutter” contracts will not suffice. Many restrictive covenants are also benefited by periodic assessment to determine whether the terms in the clause are still necessary and enforceable. These clauses are not only difficult to draft; they can also be difficult to enforce when seeking an interlocutory injunction. As such, it is highly advisable to seek professional legal advice when dealing with restrictive covenants. The Law Clinic provides professional and highly personalised legal services at a fraction of the cost of traditional representation. We pride ourselves on our customised approach to legal advice and will never produce information without catering it to our client’s individual needs. In an area as volatile and specific as restrictive covenants, this type of personal care is vital to preserving trade secrets and protected information.