In the UK the rules governing the common law doctrine of the restraint of trade have been established through case law. A restrictive covenant in an employment contract will only be enforceable by the English courts if:
(a) it can be shown that the inclusion of the restriction protects a legitimate business interest; and
(b) the restriction extends no further than is reasonably necessary to protect that business interest.
A “legitimate business interest” may include the protection of trade secrets and confidential information, the protection of connections with customers, prospective customers and suppliers, and the protection of the stability of the workforce. If the covenant is not seeking to protect one of these legitimate interests, it will in all likelihood fail.
Other factors that will be considered by the English courts when assessing the enforceability of restrictive covenants include the length of the restriction, the scope of the restriction, the nature of the business and the employee’s role within the organisation. The English courts may also take into account any remuneration paid to the employee for agreeing to a restraint of trade clause in their employment contract.
Traditionally the English courts have been very strict in relation to the enforceability of restrictive covenants. The courts have previously given limited scope as to what constitutes a “legitimate business interest” and what is reasonably necessary to protect such an interest.
Recently, however, there has been a significant trend towards enforcement, away from the court’s previous and rather more strict approach. This has been driven in part by cases which have come before the courts which have involved more senior and sophisticated employees who have had strong bargaining positions in employment negotiations.
In addition to this, the courts also generally seem to be moving towards a more employer friendly approach. Recent case law has seen a greater willingness in the judiciary to find an enforceable promise provided that the ex-employer has drafted restrictive covenants sensibly, and has followed the basic principles for protecting value and preserving reasonableness.
In the wake of the financial crisis, the employment market has become more stagnant with employees staying in their current roles for longer durations. As such, there is arguably less focus on restraint of trade provisions, and fewer disputes in relation to the enforceability of restrictive covenants.
However, there has been a marked trend, particularly within the financial services sector, of employers looking for new ways to protect value. As a consequence of highly publicised team poaching scandals, employers have been reviewing restrictive covenants carefully and have been including “team move” provisions in their senior employees’ contracts. These provisions usually place an obligation on the employee to report to their employer if they are planning to coordinate or participate in a team move, or if they are aware of any other senior employees who are planning to do so.
Controversially, there has also been a trend in employers inserting “no show” provisions into contracts of employment for newly hired employees. These clauses usually place an obligation on the new recruit to pay liquidated damages to the employer if he or she subsequently reneges on the employment contract post-signature. These provisions have mainly been used for senior executives in the financial services sector where poaching at this stage has proved to be a problem. The English courts have held that, subject to certain requirements, restrictions of this type are enforceable against employees.