Post Termination - Restrictive Covenant
Sample Restrictive Covenants Policy
Guidance Notes
Every business has information that it considers both integral and invaluable to its success. Restricting the use of this information by employees after their employment has ended may be vital to the protection of your business or customer contacts.
A restrictive covenant is typically a clause included in a contract of employment which prohibits an employee from competing with their ex-employer for a certain period after they have left the business, or prevents the ex-employee from soliciting or dealing with customers of the business, by using knowledge of those customers gained during his prior employment.
Standard types of restrictive covenants
- Non-Competition - restrictions on the former employee working in similar employment for a competitor; ¥ Non-Solicitation - prevent poaching of clients/customers/suppliers of the former employer;
- Non-Dealing - prevent a former employee from dealing with former clients/customers/suppliers, regardless of which party approached the other;
- Non-poaching - prevent an employee poaching former colleagues.
Enforcing a restrictive covenant clause is a severe encroachment of an individual’s freedom to do business. For that reason, courts will only enforce clauses that are aimed at protecting the legitimate business interests of the company and go no further than is reasonably necessary to protect those interests.
In the event of a clause being challenged, it will be the responsibility of the employer to show that it was justified and sufficiently narrow – it must not be drafted too widely.
To meet these criteria employers should be mindful of certain factors:
- The extent of the geographical area of any restriction and the length of time of the post termination restriction must be justified. It is unlikely that a wide geographical area will be justified and, as a general rule, a restriction for more than 6-12 months will be difficult to justify.
- The extent of the activities that the employer is trying to restrict.
- Consideration should also be given to the type of interest being protected, for instance, information such as trade secrets may be granted wider protection than customer information, given that its potential use across markets is wider.
- An employer may also be required to evidence any connection between the employee and any information that is being protected.
The extent of restrictive covenant clauses therefore must be relative to the employee's position within the business. As more senior employees will be in contact with more sensitive information, restrictions placed upon them may be justified as being more restrictive.
Overall, a one-size fits-all policy on restrictive covenant clauses risks any such clauses becoming unenforceable.
Restrictive covenants may also require periodic review in order to maintain their enforceability, as the reasonableness of the covenant is judged at the time it was entered into.
Sample Template
The following template policy is provided as a guide only, the policy contains all four standard types of restrictive covenants. Employers are advised to carefully review the policy with the above points in mind, ensuring it suits their needs and the needs of the role it is being applied to.
Click here for sample policy.
