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Restrictive Covenants

During employment an employee has an implied duty not to compete with their employers business or to solicit their clients, seeking to divert business away from them.  

This is the duty of Fidelity and it also applies to situations involving trade secrets and confidential information.

This duty of fidelity does not apply after the employment has finished with the exception of disclosures of trade secrets.   Employers therefore often seek to restrict the former employee by way of express contractual terms called restrictive covenants or post termination restrictions. It is often advisable for employers to also have an additional clause in relation to confidential information as not all confidential information would fall in the category of trade secrets.

In addition to post termination restrictions employers also often include in the express terms of a contract, a term relating to garden leave which means that the employer can request that the employee does not attend work and must not take up other employment during the period of garden leave.   This is only enforceable if there is an express clause in the contract providing the employer the ability to place the employee on garden leave.

Both the restraints during employment and restrictive covenants thereafter are subject to the public policy doctrine of restraint of trade that ensures that the employees retain the ability to use their skill and knowledge and earn a living.   The general rule is that all contractual restraints on a former employee's freedom to work are void and unenforceable as being in restraint of trade, and contrary to this public policy, unless they can be shown to be no wider than reasonably necessary to protect the employer's legitimate business interests.   In determining whether or not a particular covenant is reasonable, the courts will, among other things, look at the length and scope of the restriction.

Legitimate business interests fall broadly within the following categories of trade secrets, trade connections, and the stability of the employer's work-force.   The types of restrictive covenant used to protect these interests include:

  • Non-competition restrictions, which prohibit the former employee from working in a competing business.
  • Non-solicitation covenants, which prohibit the former employee from soliciting specified business connections.
  • Non-dealing covenants, which prohibit the former employee from dealing with customers or other business connections of the employer.

Employers should be careful when drafting such clauses to ensure that they can be enforced and likewise employees considering breaching or having breached these terms should seek urgent legal advice as the potential ramifications can be severe including injunctions, costs and substantial damages for breach of contract.