Restrictive covenants in compromise agreements

Redmans Solicitors
August 30, 2012

Compromise agreements are commonly used to compromise potential employment litigation. In exchange for a sum of money (or some other consideration) the employee promises not to exercise their right to sue their employer for a number of things (including, among others, unfair dismissal, discrimination and breach of contract). However, employers often require that the employee entering into the compromise agreement with them agree to certain restrictions on the employee’s behaviour after they leave the employer – these are known as restrictive covenants. They are common in compromise agreements but can often be difficult to understand (especially if they’re drafted in “legalese”). We’ll therefore take a look in this post at the following issues:

What is a restrictive covenant?
Why are there restrictive covenants in my compromise agreement?
What type of restrictive covenants can be in a compromise agreement?
Is the restrictive covenant in my compromise agreement legal?
How can I get legal advice on my compromise agreement?

What is a restrictive covenant?

A restrictive covenant is a promise by an employee (or another legal entity) to refrain from engaging in certain conduct after their employment ends (or sometimes even while the contract is continuing). An example is that of “Gardening leave” – the employee agrees not to engage in any employment after they leave their job for a certain period of time. This is an important point – restrictive covenants cannot be indefinite in scope – they can only restrict specific activities for a limited period of time.

Why are there restrictive covenants in my compromise agreement?

As an employee of a business you naturally have access to most (if not all) of the necessary information and networks that you utilise to carry out your job for your employer. Understandably, employers want to protect their commercial interests (the information and networks that you had access to) after you leave your employment. They therefore require that you agree not to do certain things for a certain period of time after you leave your employment – respect confidentiality, not practice a certain trade for a period of time, or not poach certain clients (among other things).

What type of restrictive covenants can be in a compromise agreement?

There are a variety of types of restrictive covenants. The ones listed below tend to be the most common found in contracts of employment and compromise agreements.

Non-solicitation clauses – requiring that you mustn’t “poach” (potential) clients, employees, directors (etc.) for a specified period of time after the end of your employment
Non-dealing clauses – requiring that you mustn’t deal with any (e.g.) supplier, client etc. of your previous employer for a specified period of time
Non-compete clauses – requiring that you refrain from competing against your previous employer in particular industries and/or particular areas for a specified period of time
Garden leave clauses – requiring that you refrain from working in any capacity for a period of time
Confidentiality clauses – requiring that you maintain confidentiality regarding your employment and the compromise agreement

Is the restrictive covenant in my compromise agreement legal?

Restrictive covenants are prima facie in restraint of trade and therefore null and void. However, the employer can use the restrictive covenant if they can show that:

The employer has a legitimate interest that it is attempting to protect; and
The protection sought by the employer is no more than is reasonable having regard to the interests of the parties and the public in general

If the restrictive covenant is particularly onerous then it will probably be deemed unreasonable (and therefore void). What is reasonable in the circumstances depends on the particular facts of the case.

How can I get legal advice on my compromise agreement?

It’s advisable to obtain advice from a specialist employment lawyer on your contract of employment or your compromise agreement if it contains restrictive covenants. These can affect your business dealings (potentially significantly) for an elongated period of time after you finish your employment. It’s therefore wise to ensure that your bases are covered and that you’ve received expert legal advice.

Redmans Solicitors are London employment lawyers that have employment solicitors in Hammersmith. They offer Employment Tribunal representation to employees and employers and are specialist compromise agreement solicitors.