Business Law & Compliance

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Restrictive covenants: Why you need to pay attention

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These covenants consist of contractual terms binding an employee after the termination of their contract with a previous employer, preventing them from poaching clients, contacts and/or colleagues for a period after their departure, usually between six and 12 months.

Confidentiality clauses protect an employer’s information which they have judged sensitive and confidential, and non-dealing clauses, which preclude employees from working with their ex-employers’ clients (even if the client makes the approach) for a certain amount of time, are two other common restrictions.

Failing to pay proper attention to these clauses can cause significant business interruption – especially for an SME where the cost and time implications of a court case could be incredibly disruptive. These claims can also have very severe financial consequences for small businesses if a significant financial award is made.

Here are some top tips to remember when dealing with restrictive covenants – either when hiring or drafting contracts to protect client relationships and other confidential information.

Restrictive covenants should be an important consideration during the recruitment process. You should request a copy of the provisions (both confidentiality clauses and restrictive covenants) at this early stage, especially if you are recruiting with the express intention of securing an employee’s following or utilising their contacts. 

Your next step should be to take legal advice as to the enforceability of the restrictive covenants and the scope of confidentiality provisions. 

Many covenants can be challenged and if they are deemed unreasonable, either on the grounds that the restrictive period is too long and/or because the clause covers too wide a geographic area, this will inform what the employee can do safely post termination. However, you should proceed with caution as actively attacking another business’ client base or employees will not go unnoticed. 

Talk openly with your new employee about their restrictive covenants and confidentiality provisions. The employee will understandably be keen to use their contacts and network in order to impress a new employer, though in their eagerness they may overlook the restrictions in place. 

To keep on the front foot, make sure you introduce enforceable restrictive covenants and confidentiality provisions into your current employees’ contracts. These should be updated regularly to keep them relevant to your business needs to ensure that they remain enforceable. Pay reviews can offer a good opportunity to review or introduce such clauses.

Any court action can be expensive and drawn-out, so seeking legal advice before restrictive covenants become an issue is essential to ensure your hiring processes and growth can continue uninhibited.

Tracy Lacey-Smith is the joint head of commercial litigation and dispute resolution at SA Law.

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