Restrictive Covenants In Employment Contracts

Restrictive covenants in employment contracts are anti-competitive, restrictive on trade and against public policy. A court will only enforce a restrictive covenant if it protects a legitimate business interest (trade secret or confidential information, client base, key employees or supplier relationships) and if it extends no further than is reasonably necessary to protect that interest (Herbert Morris Ltd v Saxelby [1916] AC 688 (HL)). In addition recent case law highlights emerging trends in the court's approach and other factors taken into consideration.

The restrictive covenant must be drafted specifically to protect the identified legitimate business interest using means that are reasonably necessary, especially relating to the duration, scope and nature and effect of the restriction. In Wincanton Ltd v Cranny and SDM European Transport Ltd [2000] IRLR 716,CA the failed covenant was a general clause for inclusion in all employment contracts.

Restrictive covenants generally restrict the employee from working for a competitor or in a certain location (Non-competition and Area Covenants), prevent the employee from dealing with or soliciting clients, prevent the poaching of employees or prevent the use of confidential information. Identifying the most appropriate type of covenant to protect the relevant business interest will assist in ensuring that the covenant is reasonable and enforceable.

Changes To The Court's Approach

The court has increasingly taken a purposive approach, looking at the intention of the clause and not just the literal interpretation. In Beckett Investment Management Group Ltd & Ors v Hall & Ors [2007] IRLR 293 the Court of Appeal had regard to business realities when ruling that the covenant was effective in relation to the clients of the employer's subsidiaries although the subsidiaries were not referred to in the covenant. In TFS Derivatives Ltd v Morgan [2004] EWHC 3181 (QB) Mrs Justice Cox said the first thing to look at when considering a restrictive covenant is what it means when it is properly interpreted.

The court will not re-write unreasonable restrictive covenants, but it may "sever" parts of them to make them enforceable. In TFS Derivatives the restrictive covenant referred to "any business which is either competitive with or similar to" the High Court held that the deletion of the words "or similar to" created an enforceable covenant. In Beckett the court considered whether part of the covenant could be...