Restrictive Covenants in Employment Contracts and Settlement Agreements

Restrictive covenants are clauses which appear in both employment contracts and settlement agreements entered into between employees and employers.  These clauses tend to be for the purpose of protecting an employer’s business interests and restricting competition by the employee after the termination of the employee’s employment.

Types of settlement agreement clauses

The types of clauses that you typically see include non-compete clauses as well as clauses preventing the dealing with and solicitation of clients and employees.

It is commonplace for employers to either require individuals to restate their restrictive covenants within a settlement agreement or alternatively, to enter into new restrictive covenants in the settlement agreement at a time of departure.

The purpose of requiring new restrictive covenants at the point of entering into the settlement agreement is that it is more likely for three reasons that the new restrictive covenants will be enforceable through the courts as opposed to those which were contained in the contract of employment.

  • The first reason is these restrictive covenants are entered into at the end of the employee’s employment and therefore they are current.
  • The second reason is that the restrictive covenants are entered into a time during which the employee is seeking legal advice on their settlement agreement
  • The third and final reason why it was different in that settlement agreements are more likely to be enforceable is that there is consideration i.e. a payment made under the settlement agreement which makes the restrictive covenants more likely to be binding in the courts.

Non compete restrictive covenants

Non-compete restrictive covenants are there for the purpose of preventing an employee from going to a competitor within an area surrounding the employee’s previous places of employment.

These are the most onerous curbs on the employee’s activities and as such they are the least likely to be deemed to be enforceable in the courts. 

The second most onerous restrictive covenants are covenants which prevent employees from dealing with customers following the termination of their employment. 

The third most onerous restrictive covenants arguments which prevent employees from soliciting customers following the termination of their employment.

Enforcing restrictive covenants

Restrictive covenants generally, will only be enforced through the courts in the event that the courts believe that they are going no further than protecting a legitimate business interest of the employer.

It is essential that restrictive covenants are drafted correctly and go no further than protecting a legitimate business interest because it is only in situations where they are needed, that the courts will enforce those provisions. 

It is essential that employees take legal advice prior to entering into restrictive covenants either within their employment contract or in a settlement agreement.

The reason for this is that entering into a restrictive covenant particularly in a settlement agreement may adversely impact an employee’s ability to find future employment.

If an employer believes that an employee is in breach of a restrictive covenant, then a claim may be issued in the High Court. This claim is for an injunction which is an order from the Court that the individual should cease breaching the restrictive covenant.

In addition, employers can apply for damages and or an account of profits in the event they believe that the individual has breached the clause and this has caused them to suffer financial loss.

Employees should be very careful to seek legal advice because in the High Court, costs can be recovered by the successful claimant and as such, it is important to get clear advice on one’s rights in relation to a potential breach of restrictive covenants under a settlement agreement.