Unveiling Restrictive Covenants: Enforceable or mere paper tigers?

The term "Restrictive Covenant" is not something people encounter frequently, especially when new to the workforce, with limited exposure to employment contracts yet. However, these covenants are commonly found in employment agreements and are meant to protect an employer's interests by limiting certain actions of an employee after their employment. This article reviews the most common types of restrictive covenant clauses and offers insights on whether they can be enforced.

Authors: Kelly Leung, Paralegal (pending admission) & Yami Ng, Trainee Solicitor

The 3 most common types of Restrictive Covenant Clauses

Non-Solicitation Clause

A Non-Solicitation Clause is a promise not to attempt to recruit or lure away key employees, suppliers, distributors, or customers of a company for a specific period in a particular area. This clause helps employers by preventing the loss of clients and suppliers through a contractual agreement. It also allows employers to make fair decisions about hiring and firing based on merit.

However, interpreting Non-Solicitation Clauses too strictly could harm businesses. For example, could simply chatting with former colleagues after leaving a job be considered "poaching"? If so, people might be reluctant to agree to such clauses, undermining their effectiveness.

Non-Competition Clause

A Non-Competition Clause prohibits individuals from entering the same type of business in the same market as their former employer for a specified time. In an employment context, they prevent ex-employees from competing with their former employers for a set period.

Again, being overly strict with Non-Competition Clauses is not helpful. It's vital to ensure that the restrictions are reasonable and necessary for protecting the employer's legitimate interests. However, determining what is "reasonable" can be subjective and vague. Courts use various criteria to assess reasonableness, aiming to strike a balance and decide if the restrictive covenant is justified.

Non-Disclosure Clause

A Non-Disclosure Clause in an employment contract is an essential component that aims to safeguard the confidentiality of sensitive information, particularly commercial data. By including this clause, employers establish a framework to regulate and limit access to such confidential details within the organization.

This clause not only serves to protect the intellectual property and trade secrets of external entities but also fosters a culture of mutual trust between the parties involved in the employment agreement. By outlining clear guidelines on how confidential information should be handled and shared within the company, the Non-Disclosure Clause helps to maintain a secure environment where proprietary data is safeguarded from unauthorized disclosure or misuse.

Similar to the other clauses mentioned above, Non-Disclosure Clauses typically remain in effect for a set period of time. This means that the clause will only safeguard information for a specific time period. This time period can vary depending on the nature of the information being protected, industry standards, and the specific needs of the employer. Upon expiration, the information may cease to be deemed confidential and free from restrictions.

Are restrictive covenants enforceable?

The futile yet accurate answer applies once again – it depends. Employers need to clearly define and judiciously apply these clauses to make them as effective as possible, benefiting both the employer and the employee. Failing that, the courts will step in as a last resort to ensure fairness.

Above all, it is highly recommended that the employee understands fully any clauses that are presented to them, that they make a personal assessment of their ability and intention to abide by them and ask for customisations to be made if necessary. After all, agreements go both ways.

Enlisting our firm to review the validity of clauses laid upon you

Ravenscroft & Schmierer has a strong track record in employment, advising clients on their agreements, entry and exit conditions as well in cases of unfair dismissal. Should you find yourself, either as an employer or as an employee, in a situation where you are unsure about restrictive covenant clauses, do reach out to us for more information about how we can help.

Disclaimer: Whilst every effort has been made to ensure the accuracy of this article it is general in nature and does not constitute legal advice of any kind. You should seek your own personal legal advice before taking legal action. We accept no liability whatsoever for loss arising out of the use or misuse of this article.

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