Should a Settlement Agreement include Restrictive Covenants?

Settlement Agreements & Restrictive CovenantsOften an employer will want to include in your settlement agreement a clause that restricts your activities after the end of your employment. This is known as a restrictive covenant.

Are such restrictions enforceable? Should you agree to them? The article tells you all you need to know about restrictive covenants in your settlement agreement.

Are restrictive covenants enforceable?

Restrictive covenants are enforceable only to the extent that they are reasonable.

In order to establish that they are reasonable, an employer needs to show two things:

  1. A legitimate business interest; and
  2. That the covenant goes no further than necessary to protect that interest

Is there a legitimate business interest?

It’s usually easy for an employer to show that it has a legitimate business interest to protect. The most common business interests are:

  • Customer connections – the employer doesn’t want ex-employees to poach their customers
  • Confidential information – certain matters need to be kept confidential, eg price lists, design sheets
  • Stability of workforce – the employer has an interest in ensuring that ex-employees don’t poach remaining members of staff

A court or employment tribunal will nearly always accept that it’s reasonable for an employer to protect these interest.

The second stage of the test is more tricky . . .

Does the restriction go no further than necessary to protect those business interests?

It’s more difficult for employers to show that the covenants go no further than necessary to protect the business interest.

There’s a three stage test to determine whether or not the scope of the restriction is reasonable:

1. Geographical scope

If the restrictive covenant restricts the geographical area where you can work, this should be limited to what is reasonable.

Every industry is different.

For example, a hairdresser is likely to have clients who live within a small radius, perhaps only a mile from the salon. If the employer seeks to restrict an ex-employee from working within 25 miles of the salon, this is likely to be too wide to be enforceable.

However, in other sectors, such as the insurance industry, where a sales rep does their most of their work by phone, it may be reasonable to have a restrictive covenant that covers the whole of the UK.

When your solicitor advises you on your settlement agreement, you should discuss the nature of the industry you’re in and the work that you carry out. This will enable your solicitor to advise you on whether or not the geographical scope is reasonable.

2. The restriction should be limited to the part of the business in which you were involved

You ex-employer will only be able to prevent you from working in business areas in which you had been involved when working for them.

For example, if you’re an employment solicitor, a restrictive covenant that prevents you working in employment law is likely to be reasonable . However, if the restriction prevents you working in any capacity in a law firm, this is likely to be too broad.

Similarly, if you work for a company that produces food and drink but you only work on the food side, a restriction that prevents you from working for a drinks company is unlikely to be enforceable.

If your solicitor is advising on restrictive covenants in your settlement agreement, it may be helpful to provide then with a copy of your job description.

3. The restrictive covenant should only be for a reasonable duration

Whether or not a restrictive covenant is reasonable in duration depends on how long it will take your ex-employer to establish a strong enough relationship with your contacts.

Again, this will vary depending on the industry.

Negotiating restrictive covenants in your settlement agreement

If there are already restrictive covenants in your employment contract, these will continue to apply after the end of your employment.

However, if you’re entering into a settlement agreement, this may be a good opportunity for you or your solicitor to negotiate more favourable restrictions.

For example, you could ask for:

  • a shorter duration
  • a specific list of companies that you will agree not to work for, instead of a general restriction
  • a narrower geographical scope

Alternatively, you could ask to be released from the restrictions completely. The approach you should take will depend on how strong your negotiating position is.

Would You Like Advice about the Restrictive Covenants in Your Settlement Agreement?

If you’ve been offered a settlement agreement, you’ll need to make sure you receive legal advice on it. We offer a free initial consultation.

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