What Are Restrictive Covenants, And Will They Apply After My Settlement?
By Geoffrey Caesar, specialist settlement agreement solicitor.
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Restrictive covenants are clauses in employment contracts or settlement agreements that limit an employee’s actions after they leave the company. These restrictions are intended to protect an employer’s legitimate business interests, such as client relationships, confidential information, and intellectual property. If you’re considering signing a settlement agreement, understanding restrictive covenants and whether they will apply after your departure is essential, as these clauses can impact your future employment opportunities.
Here’s a detailed breakdown of the types of restrictive covenants, how they might affect you, and how to handle them during settlement negotiations.
1. What Are Restrictive Covenants?
Restrictive covenants are legally enforceable terms that restrict certain actions of an employee after leaving a job. They aim to prevent former employees from engaging in activities that could harm the employer’s business. Restrictive covenants can be included in your initial employment contract, a settlement agreement, or both. Here are the most common types:
- Non-Compete Clause: Prevents you from working for a competing business or setting up a similar business in a specific area and for a specified period. For example, you might be restricted from working for a competitor within a 10-mile radius for six months after leaving.
- Non-Solicitation Clause: Restricts you from approaching or soliciting former clients, customers, or suppliers for business purposes. This means you cannot try to bring your former employer’s clients over to a new company or your own business for a specified time.
- Non-Poaching or Non-Recruitment Clause: Prevents you from recruiting or encouraging former colleagues to join you at a new company. If you start a new job or business, you cannot reach out to former colleagues with employment offers for a defined period.
- Confidentiality or Non-Disclosure Clause: Prohibits you from sharing sensitive information learned during your employment, such as trade secrets, pricing structures, customer lists, or marketing strategies. Unlike other restrictive covenants, confidentiality clauses often apply indefinitely.
These clauses are designed to protect the employer’s business, but they must be reasonable in scope, duration, and geographic reach to be enforceable.
2. Are Restrictive Covenants Legally Enforceable?
For restrictive covenants to be enforceable, they must be reasonable and necessary to protect the employer’s legitimate business interests. Courts typically assess the following factors when determining whether a restrictive covenant is enforceable:
- Scope and Duration: Restrictions should be limited to a specific time frame (e.g., six months or one year) and only apply within a reasonable geographic area. Overly broad restrictions are more likely to be deemed unenforceable.
- Relevance to Job Role: Restrictions must be relevant to the employee’s position. Senior employees or those with access to sensitive information are more likely to have enforceable covenants than junior employees with no access to strategic business details.
- Impact on Employee’s Career: Courts will consider whether the restrictive covenant unfairly restricts the employee’s ability to earn a living or find suitable employment. Clauses that severely limit future opportunities may not be enforceable.
In the UK, restrictive covenants must strike a balance between protecting the employer’s interests and allowing the employee to pursue legitimate career opportunities. It’s essential to consult with a solicitor if you have concerns about the enforceability of restrictive covenants in your settlement agreement.
3. Will Restrictive Covenants Apply After My Settlement?
If you sign a settlement agreement with restrictive covenants, they will generally apply after you leave the company, as the agreement is a legally binding contract. The settlement agreement may include new restrictive covenants or reinforce the ones already present in your employment contract. Here’s how these scenarios might play out:
- Reaffirmation of Existing Covenants: Some settlement agreements simply reaffirm the restrictive covenants in your original employment contract. This means you’re agreeing to abide by these restrictions as part of the settlement, even though you’re leaving the company.
- Modification of Existing Covenants: In some cases, you or your employer may wish to modify the restrictive covenants as part of the settlement. For example, the duration or geographic scope of a non-compete clause may be shortened or extended. A solicitor can help negotiate reasonable terms that allow you more flexibility while protecting the employer’s interests.
- Addition of New Covenants: Some employers add new restrictive covenants in the settlement agreement to address concerns specific to your departure. For example, if you’re leaving on contentious terms, they may add a non-solicitation clause to prevent you from contacting clients. Always review any new restrictive terms carefully to ensure they are reasonable.
Key Takeaway: Once you sign a settlement agreement with restrictive covenants, they typically apply for the duration specified. If these covenants are excessive or unreasonable, it’s important to negotiate fair terms before signing.
4. How Do Restrictive Covenants Impact Future Employment?
Restrictive covenants can affect your future employment opportunities, especially if they prevent you from working for competitors or contacting former clients. Here’s how each type of restrictive covenant can impact your career:
- Non-Compete Clauses: Non-compete clauses can limit your ability to work in the same industry within a specific area for a set period, which can be challenging if your expertise is industry-specific. This can delay your job search or limit your options if you are restricted from working for a large portion of potential employers.
- Non-Solicitation Clauses: If you’re in a client-facing role, non-solicitation clauses may prevent you from bringing your client relationships to your new position. This can impact your earning potential, especially if your success depends on your client network.
- Non-Poaching Clauses: Non-poaching clauses restrict you from recruiting former colleagues, which could affect your ability to build a team if you move into a management or leadership role elsewhere.
- Confidentiality Clauses: While confidentiality clauses generally don’t impact your ability to find a new job, they do prevent you from using certain information gained in your previous role. This could be a consideration if you’re moving to a similar role with a competitor, where your knowledge could overlap.
Key Takeaway: Restrictive covenants can have a real impact on your job search, so it’s important to understand and negotiate terms that give you enough flexibility to pursue a successful career without violating your agreement.
5. Negotiating Restrictive Covenants in a Settlement Agreement
Restrictive covenants are negotiable, and it’s crucial to work with a solicitor to ensure they are reasonable and won’t unduly limit your career opportunities. Here are some points to consider during negotiation:
- Reduce Scope and Duration: You can negotiate to reduce the geographic area or duration of a non-compete clause to something more reasonable, such as limiting it to a few months instead of a year.
- Specify Exclusions: In some cases, you may be able to negotiate exclusions. For example, a non-solicitation clause could exclude clients you brought into the company or those with whom you had little to no interaction.
- Add Financial Compensation: If restrictive covenants will severely limit your ability to find work, you may be able to negotiate additional financial compensation to cover this period. For example, if a non-compete clause effectively keeps you from working in your field for six months, request a lump sum to account for lost income.
- Define Terms Clearly: Ensure that the language of each clause is clear and specific. Ambiguously worded covenants are more challenging to enforce and could put you at risk of unintentionally breaching the agreement.
Key Takeaway: Working with your solicitor to negotiate reasonable terms will help you protect your ability to work and reduce the impact of restrictive covenants on your career.
6. What Happens If You Breach a Restrictive Covenant?
If you breach a restrictive covenant, your former employer may take legal action, which could include seeking an injunction to stop the breach or pursuing financial damages for any losses they’ve incurred.
- Injunctions: An injunction is a court order that prevents you from taking certain actions, such as working for a competitor or soliciting clients. Injunctions are a common remedy in restrictive covenant cases, as they immediately stop the behavior in question.
- Financial Damages: If the employer can prove they suffered financial loss due to your breach of the covenant, they may pursue a claim for damages. For example, if you solicit a major client from your former employer, they might seek compensation for lost business.
- Legal Fees and Reputation Impact: Legal disputes can be costly and may damage your professional reputation. To avoid potential breaches, it’s best to understand and adhere to the terms of your settlement agreement fully.
Key Takeaway: Breaching a restrictive covenant can have serious consequences, including legal action and financial liability. Always consult with your solicitor if you’re unsure whether an action would breach your settlement agreement.
Final Thoughts: Protecting Your Future While Honoring Restrictive Covenants
Restrictive covenants can significantly impact your future employment options, so it’s important to understand their implications before signing a settlement agreement. By reviewing the scope, duration, and geographic limitations with a solicitor, you can negotiate fair terms that protect your career flexibility. Remember, restrictive covenants must balance your former employer’s interests with your right to earn a living, and a well-negotiated settlement agreement can provide this balance.
If you’re unsure about the terms of restrictive covenants in your settlement agreement, a solicitor can help clarify what’s fair, negotiate adjustments, and ensure you can move forward in your career without unnecessary constraints.
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