Can You Negotiate Restrictive Covenants in a Settlement Agreement?

When you leave your employment under a settlement agreement, your employer may refer to restrictions that continue to apply after your employment ends. These are known as restrictive covenants or post-termination restrictions.

In most cases, the employer is not introducing completely new restrictions in the settlement agreement. More commonly, the settlement agreement repeats, confirms or re-asserts restrictions that already exist in your employment contract.

Even so, the settlement agreement process can be an important opportunity to review those restrictions and, where appropriate, negotiate a reduction in them.

What Are Restrictive Covenants?

Restrictive covenants are clauses that limit what you can do after your employment has ended.

They may restrict your ability to:

• work for a competitor;

• contact clients, customers or suppliers;

• deal with former clients or customers, even if they approach you first;

• poach or recruit former colleagues;

• use confidential information; or

• set up a competing business.

The most common types of restriction are:

• non-compete clauses, which restrict you from working for a competitor;

• non-solicitation clauses, which prevent you from approaching clients, customers or staff;

• non-dealing clauses, which prevent you from dealing with certain clients or customers, even if you do not approach them first;

• non-poaching clauses, which prevent you from recruiting former colleagues; and

• confidentiality clauses, which restrict your use of confidential information.

Do Restrictive Covenants Still Apply After a Settlement Agreement?

If your employment contract contains restrictive covenants, they may continue to apply after your employment ends.

A settlement agreement will often include wording confirming that those restrictions remain in force. Sometimes the agreement will repeat the wording of the restrictions. In other cases, it will simply refer back to the relevant clauses in your employment contract.

This is why it is important to provide your solicitor with a copy of your employment contract when you are taking advice on a settlement agreement. Without the contract, it may not be possible to give full advice on the restrictions that will continue to apply after termination.

Are Restrictive Covenants Enforceable?

Restrictive covenants are not automatically enforceable.

The courts have considered the enforceability of restrictive covenants in many cases, including the Supreme Court decision in Tillman v Egon Zehnder Ltd, but in practice each case depends heavily on the wording of the restriction, the employee’s role and the real risks to the employer.

The general rule is that a restriction will only be enforceable if it goes no further than reasonably necessary to protect a legitimate business interest.

An employer may have a legitimate interest in protecting:

• customer or client relationships;

• confidential information;

• trade secrets;

• supplier relationships; or

• the stability of its workforce.

However, an employer cannot simply prevent you from competing because it would prefer you not to work elsewhere. The restriction must be proportionate and properly limited.

What Makes a Restrictive Covenant Unreasonable?

Whether a restrictive covenant is reasonable will depend on the facts.

The key questions usually include the following.

1. How long does the restriction last?

A restriction should last no longer than is reasonably necessary.

For example, a six-month restriction may be easier to justify than a twelve-month restriction, but there is no fixed rule. Much depends on your seniority, your role, your access to clients or confidential information, and the nature of the employer’s business.

2. Which clients or customers are covered?

A restriction is more likely to be reasonable if it is limited to clients or customers with whom you had material contact during a defined period before your employment ended.

A restriction that applies to every client of the business, including clients you never dealt with, may be too wide.

3. What type of work are you prevented from doing?

A covenant should usually be limited to the part of the business in which you were involved.

For example, if you worked in one specialist area, it may be unreasonable for your employer to prevent you from working in a completely different area of the same industry.

4. Is there a geographical limit?

Some restrictions apply within a particular geographical area. Whether that is reasonable depends on the nature of the role and the market.

A local business may only need a narrow geographical restriction. A business operating nationally or internationally may argue for a wider restriction.

5. Is a non-compete clause really necessary?

A non-compete clause is often the most restrictive type of covenant because it may stop you working for a competitor altogether.

In many cases, an employer can protect its legitimate interests through narrower restrictions, such as a non-solicitation clause, a non-dealing clause or a confidentiality clause.

For that reason, non-compete clauses can often be a particular focus when negotiating a settlement agreement.

Can You Negotiate Restrictive Covenants in a Settlement Agreement?

Yes. There may be scope to persuade your employer to waive or reduce the restrictions when you are negotiating a settlement agreement, even where the restrictions already exist in your employment contract.

This is because the employer may be asking you to sign a settlement agreement in return for compensation, waiver of claims and other promises. That gives both sides an opportunity to agree the terms on which the employment relationship will end.

You may be able to negotiate:

• removal of the restrictions completely;

• a shorter restricted period;

• a narrower definition of restricted clients or customers;

• removal of a non-compete clause;

• permission to work for a particular employer;

• permission to deal with particular clients;

• a narrower geographical area;

• a carve-out for contacts you had before joining the employer;

• clarification that the restrictions will not prevent you taking up a specific new role; or

• confirmation that only some of the contractual restrictions will continue to apply.

If the agreement includes a separate payment for restrictive covenants, there may also be tax implications.

The best approach will depend on your negotiating position and your future plans.

When Is It Worth Negotiating the Restrictions?

It may be particularly important to negotiate restrictive covenants if:

• you already have another job offer;

• you want to work for a competitor;

• you are planning to set up your own business;

• the restrictions are very long;

• the restrictions apply to clients you never dealt with;

• the restrictions would prevent you earning a living in your normal field;

• the settlement compensation is modest compared with the restrictions being imposed;

• your employer is keen for you to sign quickly; or

• there is a dispute about the circumstances of your departure.

Sometimes the practical issue is not simply whether the covenant would ultimately be enforceable in court. The existence of the restriction may still create uncertainty, delay your next move, or cause concern for a prospective employer.

For that reason, it is often better to deal with the issue clearly in the settlement agreement rather than leave it unresolved.

What If Your Employer Refuses to Remove the Restrictions?

Your employer may refuse to remove the restrictions completely. However, that does not necessarily mean the issue is closed.

You may still be able to negotiate a compromise.

For example, instead of asking for all restrictions to be removed, you could ask for:

• the non-compete clause to be removed, while accepting narrower non-solicitation restrictions;

• the duration to be reduced from twelve months to six months;

• the restrictions to apply only to named clients;

• written consent to take a specific role;

• clarification that passive contact from former clients will not breach the agreement; or

• an agreed list of companies or clients that are outside the restriction.

A practical compromise may be more achievable than complete removal.

Alternatively, if your employer insists that you remain bound by the restrictive covenants, you could use that as leverage for negotiating a higher payment to reflect the length of time you’ll be out of work.

Why Your Solicitor Needs to See Your Employment Contract

When advising you on a settlement agreement, your solicitor should also review the restrictive covenants in your employment contract.

This matters because the settlement agreement may not set out the restrictions in full. It may simply say that the restrictions in your contract continue to apply.

Your solicitor will need to consider:

• what restrictions are already in the contract;

• whether the settlement agreement repeats or changes them;

• whether the employer is asking for any new restrictions;

• whether the restrictions appear too wide;

• how they affect your future employment plans; and

• whether there is scope to negotiate narrower wording.

You should therefore send your solicitor a copy of your employment contract, any amendments to it, and details of any new role or business plans.

Should You Agree to Restrictive Covenants in a Settlement Agreement?

You should not ignore restrictive covenants just because they are already in your employment contract.

The value of a settlement offer should be assessed in the round, including whether the restrictions may limit your next job or business plans.

The settlement agreement may be your best opportunity to negotiate them.

Before signing, ask yourself:

• Will these restrictions affect my next job?

• Could they prevent me working for a competitor?

• Do they apply for longer than necessary?

• Do they cover clients I never dealt with?

• Are they wider than my employer reasonably needs?

• Could I ask for them to be reduced?

• Should the agreement include permission for a specific future role?

A settlement agreement is not just about the compensation payment. It is also about the terms on which you move on.

Would You Like Help Removing Restrictive Covenants?

If you’ve been offered a settlement agreement, you’ll need to make sure you receive legal advice on it. It’s a great opportunity to negotiate a release from restrictive covenants. 

Our settlement agreement advice service can help you understand the restrictions, the compensation package and the practical effect of signing.

We advise clients throughout the UK and there’s no need to make an appointment. Call us now for a free consultation.