Restrictive covenants in employment contracts – what the government is proposing

Authored by DAS

What are post-termination restrictive covenants?

Post-termination restrictive covenants in employment contracts are used to protect a business when employees are departing who may have had access to trade secrets, strategic plans, financial plans and customer or client confidential information.

Often the most contentious of post termination restrictive covenants are non-compete clauses because these clauses place the most restriction on an employee leaving and working for a competitor.

Whilst they are there to protect the business to ensure an employee doesn’t attempt to use this information for the benefit of their new employer, these clauses need to be carefully drafted for employers to ensure that if a breach occurs, they are then enforceable.

Often the most contentious of post termination restrictive covenants are non-compete clauses because these clauses place the most restriction on an employee leaving and working for a competitor.

As a restrictive covenant is considered a restraint of trade, the employer must show that there is a legitimate proprietary interest that is appropriate to protect and the protection sought is no more than is reasonable taking into account both parties interests.

An employer would not be able to enforce a restrictive covenant on an employee if the restriction placed on them is too wide, unreasonable or entirely stops that employee finding new employment in their area of skill or trade.

Non-compete clauses should be reasonable and properly thought through…there is little point having such clauses in a contract if they cannot be enforced

When considering whether a restrictive covenant is enforceable a court will take into account what the business is trying to protect (i.e. customers, information), the timescales post termination the restriction is in place (i.e. 3 to 6 months) and the geographical area (within a number of miles where the business is trading).

What is the Government doing?

On the 12 May 2023 the Government published a response to the government consultation on reforming post termination non-compete clauses, proposing putting a limit on the timescales a non-compete clause is in place when the employee leaves employment.

There are no changes proposed to non-solicitation or non-dealing clauses. This proposed change will need to be set out in legislation, so it is unclear when such a change will come into force.

It is, however, important for business to keep in mind the requirement that non-compete clauses should be reasonable and properly thought through before putting them in employment contracts. Whilst it is a good deterrent on employees, there is little point having such clauses in a contract if they cannot be enforced when a business genuinely needs to protect itself.

If you would like us to review your restrictive covenants applicable to your business please do get in touch.

Need to know more?

For more information on these changes or assistance with updating your policies or contracts, CLICK HERE, leave a message and youTalk-insurance will pass your enquiry on.