Restrictive covenants for employees are contractual clauses (in Employment contracts) that may limit an employee’s actions after leaving a job, such as prohibiting them from competing with their former employer, soliciting clients, or revealing trade secrets.

I often hear a myth that they are not enforceable.

The test the Court used to adopt was that they were unlawful unless deemed reasonable and necessary. Nowadays, the Court is more likely to have a starting point that they will be enforceable provided they are reasonable and necessary. It’s a slight difference, but a difference in approach nonetheless.

The doctrine of Restraint of Trade is the principle that an individual should be free to follow his trade and use his skills without undue interference. The principle renders a contractual term purporting to restrict an individual’s freedom to work for others or carry out his trade or business void unless it is designed to protect legitimate business interests and no wider than reasonably necessary.

Courts will enforce restrictive covenants if they are deemed reasonable and necessary to protect the legitimate business interests of the employer.

When assessing the enforceability of restrictive covenants, courts generally consider the following factors:

1. Scope: The covenant’s scope, including its geographical reach, duration, and the specific activities it restricts, must be reasonable. Overly broad restrictions may be deemed unenforceable.
2. Legitimate Business Interest: The employer must demonstrate that the covenant is necessary to protect its legitimate business interests, such as trade secrets, customer relationships, or goodwill.
3. Balancing Interests: Courts balance the employer’s need for protection against the employee’s right to earn a living. Covenants that disproportionately harm the employee’s ability to work may be deemed unreasonable.

However, if a restrictive covenant is found to be overly broad or unduly burdensome, courts may either refuse to enforce it or modify (or sever) its terms to make it more reasonable.

Drafting Restrictive Covenants

It is vital for an employer wanting to potentially rely upon its restrictive covenants to have them properly drafted by an expert legal advisor.

The Court’s approach is to consider reasonableness, and it does this by assessing the following guidelines :

• The court must first decide what the covenant means when properly construed.
• The court will then consider whether the former employer has shown that it has legitimate business interests requiring protection in relation to the employee’s employment.
• The covenant must then be shown to be no wider than is reasonably necessary for the protection of those interests.
• Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply.
• Even if the covenant is held to be reasonable, the court will finally decide whether, as a matter of discretion, the injunctive relief sought should in all the circumstances be granted. In making this decision, the court will have regard to, among other things, its reasonableness as at the time of trial.
• Severability. Severability is a possibility provided certain criteria are met. However, given the possible cost implications to the employer it is a tool of last resort rather than a principle to be relied on in drafting wider covenants than reasonably necessary.
• If a restrictive covenant applying after employment has terminated is held to be unreasonable, then it is void and unenforceable.

When I’m drafting restrictive covenants, I’ll always bear in mind the latest legal cases to ensure that we put the best foot forward on enforceability.

Boydell v NZP Ltd and others [2023] EWCA Civ 373

Dr Boydell worked as Head of Commercial – Specialty Products for NZP Ltd. NZP’s business was in a niche area of the pharmaceutical industry. When Dr Boydell resigned to work for NZP’s main competitor, NZP sought injunctive relief. It relied on a 12-month non-compete in Dr Boydell’s contract which prevented him being involved in any activity for the benefit of any third party that carried out any business which would compete with the business of NZP or any other company in the group. The High Court severed some of the clause, including the reference to group companies, and granted an injunction.

Dr Boydell appealed. He argued that, as drafted, the clause prevented him from working at any company which produced general pharmaceutical products including nasal sprays, such as Boots or Superdrug, which went beyond what was reasonably necessary to protect NZP’s legitimate interests. Therefore, severance of the group company wording significantly changed the nature of the restraint, contrary to the principles set out by the Supreme Court in a case known as Tillman. He also argued that the clause was too wide to be enforceable even after severance.

In my opinion, the contract clauses could have been drafted in a better way, although they were also detailed and bespoke. They were, for what its worth, as follows:

3.1 The Employee agrees with the Company, that they will not, for a period of 12 months after the termination of their employment with the Company for whatever reason, be involved directly or indirectly, in any activity, whether as a self-employed person or as an employee, even on an occasional basis or without remuneration as a partner, director, employee, contractor, assistant, or agent, independently of their duties under their new business relationship for the benefit of any-subject, natural or legal person, company or other entity howsoever defined that carries out any business activity that would compete with the business activity as carried out by the Company or any of its affiliates, including each entity in the Group (together, the “Group Companies”), or that any Group Company was actively considering carrying out as evidenced by board minutes, at the date of termination of the Employee’s employment, including collection of bile or other related animal products, processing of bile or other related animal products, conversion of bile or other related animal products for pharmaceutical use, any activities relating to the supply chain, manufacturing or use of bile from various animals, including but not limited to cattle, chicken, pigs; any business related to cholic acid or any derivatives (including UDCA – ursodeoxycholic acid), and anything that is either related to or is a substitute of [sic] such products; any pharmaceutical business that involves applications for gallstone dissolution, PBC (primary biliary cholangitis), or other liver or GI (gastrointestinal) related conditions. For the purposes of this non-compete covenant, amongst the companies which are to be considered as competitors, are included by way of example, the following (including the relevant parent subsidiaries and/or affiliates): Belling, Pharmazell, Dipharma. Falk/Tiefenbacher, Pro.Med, Riverson, Cheplapharm, Daewoong Mitsubishi Pharma.”

There were some additional clauses in the contract as well, which were slightly more standard.

The Court of Appeal rejected the appeal. It found that:

1. Dr Boydell’s construction of the non-compete clause as preventing him from working for companies such as Boots or Superdrug was a ‘fantastical, extravagant, improbable or unlikely consequence that was not within the parties’ contemplation when the contract was signed’. It could therefore be ignored. The clause was clearly directed towards the specialist activities of NZP. It was not plain and obvious that the clause was incapable of severance. Therefore, the High Court was entitled, at interim stage, to sever the group company wording from the clause.
2. The clause was not too wide to be enforceable after severance. The clause was wide, but decisions in this field are highly fact sensitive. Where the employer is a large public company with multiple areas of activity, a wide covenant may be difficult to justify. However, it is less obviously so where the employer has a highly specialised business. In this situation, if Dr Boydell were to move to a competitor, it may be unrealistic to insulate him from competitive activity.

Interestingly, the Court said that clauses like clause 3.5 below were “rarely worth the paper they used to be written on, or the digital equivalent”. The clause, which is very common but pointless, said:

3.5 The Employee and the Company agree that the obligations set in this variation are reasonable and that the consideration above is reasonable and that they intend the obligations in this clause to operate to the maximum extent.

Severability – the Tillman test

Summary on Restrictive Covenants

I appreciate this article is quite technical for most people, but I wanted to demonstrate the importance of getting restrictive covenants right and that they can in fact be relied upon and enforced if done properly.

Whether you’re an employer faced with an employee leaving and breaching potential restrictive covenants and you want to know whether you can stop them from causing damage to your business, or if you’re an employee faced with a strongly worded letter before action from your previous employer, get in touch and I can help.

To answer the original question Are restrictive covenants still enforceable against employees? – the answer is a resounding yes.