In Scotland, employers can protect their business from unfair competition from employees (current and former) with restrictive covenants. Post termination obligations can be put in place, usually as part of a contract of employment or service agreement. It is recommended that restrictions are put in place for key employees who, by reason of their position in the business (for example seniority, technical specialism, level of client interface) have knowledge of business critical information such as financial information, sales and marketing plans, pricing, business processes and customer lists.
Under Scots law, restrictions are not automatically enforceable by employers and will be upheld by a court only where they go no further than protecting the employer's "legitimate business interests" namely, trade secrets, trade connections and stable workforce. Generally speaking, courts will enforce restrictions where the protection goes no further than is reasonable. Courts will consider whether the restriction was reasonable at the time it was entered into, rather than when the employer tries to enforce it. This means that it is important to ensure that at the time of drafting, restrictions are tailored to protect the specific needs of the business and the contents should be kept up to date to reflect changing business requirements, for example, if the employee is promoted or gains access to new client lists or data.
What are the key types of restrictive covenants in your jurisdiction?
- Non-solicitation: seeks to prevent employees from enticing the employer's current, former or potential clients, customers or suppliers to do business with them instead of the original employer.
- Non-dealing: seeks to prevent employees from doing business with or accepting business from the employer's current, former or potential clients, customers or suppliers. This restriction is wider than non-solicitation as it covers situations where the employer's contacts approach the employee.
- Non-poaching: seeks to prevent employees from enticing and recruiting colleagues to leave the original employer and work with or for them instead.
- Non-compete: seeks to prevent employees from working for a competitor, or setting up their own business in competition with the employer. This is the widest reaching restriction and is therefore the hardest to justify to a court.
Does the employer have to pay compensation to the employee in relation to the restrictive covenants?
No, payment is not required.
Are there limits to the post-employment restriction period and to the geographical area of the restrictive covenants?
No, there are no prescribed legal limits however, to be enforceable, restrictions must go no further than necessary to protect the employer's legitimate business interests. In practice, this means that the duration of the covenant should be tailored to the specific business interest that the employer seeks to protect. For example, in sectors where technical information quickly becomes out of date, a covenant with a shorter lifespan may be more appropriate as it may not be possible to justify a restriction of more than a few months. To help with enforceability, the duration of the restriction should be reduced by any time the employee could spend on garden leave and this offset should be specifically provided for under the employment contract.
When considering territorial restrictions, employers need to consider the relevant business interest. For example, it would not be appropriate to apply a national or global restriction, if the business is predominantly focussed on a local market.
Can the employer unilaterally revoke the agreed restrictive covenant at the end of the contract or otherwise avoid its application?
Yes. There is no prescribed requirement for an employer to follow any particular process to revoke a restrictive covenant. The employer could simply inform the employee that s/he is released from the restriction, or the employer may choose not to take action to enforce it if, for example, the employee is found to be working for a competitor, or conducting business with a customer.
What remedies are available to the employer when an employee breaches their restrictions?
In situations when an employee has breached their restrictive covenants, it is important to take action immediately. Employers can apply to the court for an Order called "interim interdict". This is a temporary measure which upholds the restrictions and prevents an employee from unfairly competing with the employer.
If a restriction has already been breached and business has been lost meaning that interim interdict would not be worthwhile, then legal action can be taken against the employee to recover the losses sustained as a result of the breach of contract. It may also be possible to sue the new employer where there is evidence that the employer induced the breach.
If you are looking to introduce or enforce restrictive covenants, seek legal advice immediately. Tailored drafting is needed to ensure that employment restrictive covenants are enforceable and time is crucial when trying to prevent a breach.