Restrictive covenants & non-compete clauses: termination of contract
Restrictive covenants are clauses that can often be found in employment contracts. They can also be included within job descriptions, recruitment letters and bonus plans.
They limit what employees can do for a specified length of time after their employment ends to protect the employer’s valuable data and prevent employees from joining rival businesses.
In the recent case of Richard Baker Harrison -v- Brooks, the employer sued two former employees to enforce confidentiality and non-competition restrictions, among other common ends of employment restrictions. The employer claimed that the employees founded a start-up rival and, despite their contractual obligations, deliberately tried to redirect business away from his company to their start-up.
The employees were considered to be in breach of their implied contractual duties (as well as a fiduciary duty in the instance of one employee). The High Court also held that the non-solicitation and non-dealing covenants’ scope and lengths of 12 and 9 months were appropriate.
Judge Obi was convinced that the employer’s “customer/supplier connections, the stability of its workforce, and the protection of its confidential information are all legitimate business interests requiring protection.” However, it was “trite law that during the currency of the employment relationship the employer is entitled to protect confidential information whether it amounts to a trade secret or not.”
It is often assumed that employers rarely enforce restrictive covenants. Contrary to this popular belief, courts regularly enforce restrictive covenants in employment contracts.
When considering restrictive covenants in employment contracts, read between the lines, and pay attention to whether they accomplish a justifiable interest of the company.
To have a restrictive covenant enforced, an employer must show that the clause protects one or more legitimate business interests. Moreover, the employer must demonstrate that the clause is reasonable – in that it only goes as far as is necessary to preserve the employer’s legitimate business interests.
Legitimate business interests that an employer has the right to preserve through post-termination limitations include:
The employer’s confidential data and connections with clients;
The stability of the employer’s workforce.
When determining whether a provision is enforceable, the court will take into account the following factors as of the date the covenant was entered into:
Are the restriction time limit and geography reasonable?
Does the clause go further than necessary to protect the company’s legitimate interest?
When there is a change of roles among directors or employees, employers should evaluate the company’s restrictive covenants. Typically, that person gains access to know-how covering both suppliers and customers.