Restricting Restrictive Covenants?

The Government has recently commenced a consultation on the future of restrictive covenants. Restrictive covenants are contractual clauses which are often put in place by employers seeking to prevent their employees from doing certain things after their employment ends, such as working for competitors, soliciting or dealing with customers, or poaching staff. They have been around for over 100 years and are governed by common law. In other words, they are not covered by any statutory provision, but rather their validity and implementation has developed as a result of innumerable court cases over the years.

The starting point is that any form of post termination restriction is in restraint of trade, and therefore, will only be enforceable to the extent that it is necessary to protect the employer’s legitimate business interests, and is reasonable. The cases tend to be very fact specific, with factors like the seniority of the employee, the scope of the restrictions and their duration being things which the court will consider in deciding whether they are enforceable.

Options for change

As stated above, the Government has started a consultation to consider the future of restrictive covenants. One possibility being put forward is a requirement for the employer to carry on paying the employee a percentage of their salary for the duration of the covenants. It is felt that this would stop the widespread and often inappropriate use of restrictions, and make employers consider whether they are really necessary. If this were implemented, it would certainly cause employers to think carefully before including restrictive covenants in a contract of employment. It would also have the likely consequence of increasing the use of garden leave, particularly for senior employees, and no doubt reduce the duration of restrictions for those that continue to have restrictive covenants imposed. This idea is not new – it is already a requirement in many countries including Germany, France and Italy, so is a real possibility.

Another possibility being mooted is imposing a statutory time limit on the duration of restrictive covenants. If the idea of compensating the employee for having a restrictive covenant comes into law, the length of any restriction is likely to be shortened anyway. A statutory cap may have some impact on the misuse of restrictive covenants, but in any event, the courts already in practice impose a cap, with restrictions which exceed 12 months in duration being very unlikely to be enforceable.

The nuclear option in the consultation document is to ban post termination restrictions altogether. Doing this would give certainty, and it is suggested that doing away with restrictive covenants would be good for the economy, as it would encourage people to start new businesses and allow for a better flow of ideas and increased competition. Employers would still be able to impose some form of restriction on what an employee can do once they have decided to leave by putting them on garden leave, but there would be a significant unwelcome cost for employers in doing this.

Having a say

Employers who want to have their say can take part in the consultation exercise here. It may be that nothing will come of this consultation, but if it does, we will keep you informed.