What are the key types of restrictive covenants in your jurisdiction?
Many employers insert post employment termination restrictions in employment contracts with the aim of protecting their business from the damage the employee could do in moving to a competitor.
Similar to the UK, there are a number of different types of restrictive covenant frequently used in Ireland designed to prevent a former employee from certain competitive activities for a period of time after their employment ends.
There is always a question mark over the enforceability of restrictive covenants and whether they amount to an unlawful restraint of trade or a reasonable clause to protect an employer's legitimate goodwill. The courts will heavily scrutinise whether such a restriction extends further than is necessary to protect the employer's business interests and if so, the restriction will be unenforceable.
In summary, the most common types of covenant are:
- Non-solicitation: preventing the former employee from approaching customers or clients of the employer with a view to winning their business.
- Non-dealing: this covenant goes further than the non-solicitation covenant and aims to prevent the former employee from providing services to customers or clients – this includes the situation when the customer or client approaches the individual. These types of covenant can be harder to enforce.
- Non- poaching: preventing the former employee from soliciting other employees from their former employer. Non-employment covenants take this concept further and prevent the former employee from employing or facilitating the employment of their former colleagues. Anti-team move clauses seek to prevent a team move.
- Non-compete: described as "the most powerful weapon in an employer's armoury", this covenant prevents an employee joining a competitor employer for a set period.
In addition to the above covenants employers may also seek to require their employees to notify them of offers of employment and to inform any potential future employer of the restrictions to which they are subject.
Employers also rely on confidentiality provisions and fiduciary duties to limit potentially damaging activity.
Employers may also use long notice periods and require the employee to serve out notice on "garden leave" to lock an employee out of the market.
Does the employer have to pay compensation to the employee in relation to the restrictive covenants?
Under the basic principles of contract law it is important for the employer to give valid consideration in order for the restrictions to be enforceable. This is not an issue at the start of the employment relationship as the salary, benefits and any other remuneration paid under the contract should suffice. However, if covenants are entered into during the employment relationship or on redundancy or termination the employer will need to assign valid consideration, pay reviews provide a useful opportunity to implement new or updated restrictions.
Again, similar to the UK, under current Irish law employers are not legally required to pay compensation for the period the employee is restricted.
Are there limits to the post-employment restriction period and to the geographical area of the restrictive covenants?
Restrictive covenants will only be enforceable if they are no wider than is reasonably necessary to protect the employer’s legitimate commercial interests. If they are too wide they will not be enforceable. It is therefore important that restrictive covenants are focused on the potential business risk and are measured and reasonable in their extent taking account of all the circumstances.
For example, the Irish High Court refused an application by Ryanair for an injunction to prevent its former Chief Operations Officer (COO) from joining easyJet. It held the restriction in question was void and unenforceable as an unjustified restraint of trade. Difficulty arose for Ryanair as the covenant applied to any business wholly or partly in competition with Ryanair for air services. It applied not only to low cost airlines, but also to "legacy or flag or high cost" airlines. It was clear that there are two "spaces" in the market: the low cost space and the legacy or flag space, in which the fares are considerably higher. It was acknowledged in evidence that if the COO had wanted to join a high-cost airline a different view would have been taken by Ryanair. Allen J. therefore found: "It seems to me to follow that the commercial information that the COO has is not sufficient justification for preventing him from taking up employment with a legacy airline and that the restraint is too wide". The other provision of the restraint in this case that troubled the High Court Judge was the prohibition on employment "in any capacity". It appeared to the Judge that literally construed this would restrain the COO from taking up employment with another airline as a pilot or air steward. He found the restraint on employment "in any capacity" went beyond the interest Ryanair sought to protect and was not shown to be justifiable.
Length of restriction
With the exception of confidentiality, post-termination restrictions must be time bound. When considering what length of time would be reasonable the primary consideration is whether the duration is no longer than is necessary to protect the employer's legitimate business interests. A multitude of factors are taken into account, including:
- How long would it take to replace the employee and how long would it take for the replacement to build up relationships with key stakeholders?
- The length of time after which the value of any commercially sensitive information the former employee may have would have diminished.
- The length of time after which the commercial threat that the former employee might pose would have diminished.
- The frequency of contact the former employee had with customers and clients and the longevity of the relationships.
- The industry standard (if there is one) in the former employee's sector.
The current trend is for restrictions to last for three to twelve months depending on the industry involved. In fast moving industries where the value of any initial advantage rapidly disappears, three months may be appropriate. It is also necessary to factor in the ability to place the individual on garden leave and ensure this is reflected in the overall length of the restrictive covenant.
Limiting activity on a geographical basis prevents the former employee from carrying out activities in a specified area. The greater the area, the less likely that the restriction will be enforceable. With technological advances and reduced reliance on physical presence many employers work both nationally and globally, reducing the use of geographical restrictions. However, where an employer is seeking to limit an employee's activities geographically they will need to demonstrate that they have a legitimate business interest to protect and that the covenant is no wider than is reasonable and necessary. When operating on a global scale employers may also seek to implement a worldwide restriction, the same test will apply.
Can the employer unilaterally revoke the agreed restrictive covenant at the end of the contract or otherwise avoid its application?
As the employer is not legally required to pay compensation to the former employee during the restricted period it is less common for the employer to seek to revoke the restriction to avoid its application in Ireland. In situations where the employee is being compensated during the restricted period careful drafting should be utilised to ensure the employer can revoke the restrictive covenant agreement to compensate should the employee not pose a threat at the point of redundancy or termination.
What remedies are available to the employer when an employee breaches their restrictions?
Employers often seek injunctions to restrict the former employee. Prohibitory injunctions are the most common form of injunctive relief in restrictive covenant cases. The order prevents the former employee from doing a certain activity – such as soliciting clients.
Injunctions may be granted on either an interim basis or a final basis. Interim injunctions are granted on a short-term basis until the dispute can be fully considered in court, whereas injunctions granted on a final basis are considered to be permanent.
Employers also frequently request undertakings (a binding promise) from the employee to refrain from breaching the contractual restrictions pending the outcome of the court proceedings.
Employers may also seek damages relating to the loss suffered by the employer in consequence of the former employee's unlawful activity.
Litigating restrictive covenants can be a time consuming and financially draining process. It is important for employers to act quickly to reduce the damage the employee can cause once the employment relationship has terminated. Where possible managing the restricted period without litigation is preferable. Having bespoke robustly drafted restrictions which are reviewed regularly and revisited on any promotion is crucial.
Employers need to exercise particular caution in using standard restrictive covenants. Covenants need to be tightly tailored to reflect the particular damage the employee could do post-termination of employment.
Employers should carefully consider restrictive covenants with senior employees, particularly those who are in possession of valuable confidential information and pay particular attention to the express terms of restrictive covenants which address the type of role and business the employee is prohibited from entering into.