Restrictive Covenants in Employment Agreements

 

 

Restrictive Covenants in Employment Agreements

We are often asked to advise clients both from an employer and an employee perspective as to whether a particular restrictive covenant is enforceable.

 

What is a restrictive covenant?

 

A restrictive covenant is a clause which is usually inserted in an employee’s contract and is designed to exert some measure of control over the employee’s actions after they leave employment. In particular it is usually designed to prevent the employee from competing with the employer’s business or from taking clients/customers. It can also be designed to prevent the employee from soliciting clients or employees from their former employer.

 

The enforceability of such clauses has to be placed in context with the right of every employee to earn a livelihood. If a restriction unfairly impinges upon that right and prevents the employee from earning a livelihood then there is a string possibility that the Courts will be unwilling to uphold the restriction in question. For instance, a clause that prohibits an employee from working for a competitor at all could prevent the employee from earning a livelihood and is unlikely to survive the Court’s scrutiny.

 

A recent example of where a restrictive covenant fell foul of the test of reasonableness was in the case of Ryanair –v- Bellew which came before the High Court in January 2019.

 

The Court was asked to consider a twelve month non-compete clause in relation to Mr. Bellew who was a COO and who resigned to take up a position with a rival low cost airline. Ryanair sought an injunction to prevent Mr. Bellew from taking up the position because they felt that he had substantial information as part of their inner strategy group which could have been passed on to his new employer.

 

The Court felt that a twelve month non-compete clause was reasonable. However, it held that the clause had to be limited reasonably to reflect the role which the employee was carrying out. In this case, the restrictive covenant prevented Mr. Bellew from working any role with any airline i.e. it prevented him from taking up a lower position such as a baggage handler or a member of cabin crew and it also prevented him taking up a role with a “legacy airline” i.e. a non-low cost carrier.

 

Mr. Bellew argued that he was subject to a confidentiality clause and that it was his intention to be bound by that clause ,ie that this was a sufficient defence to the fear expressed by Ryanair that he would share some of the crucial information/strategy he had learnt while in the employment of Ryanair. The High Court felt however that such a clause would be very difficult to enforce and that if the restrictive covenant was reasonable and enforceable that it would supersede any confidentiality clause.

 

In the circumstances of this particular case however it found that the restrictive covenant was unreasonable in that impeded Mr. Bellew taking up any position within the airline industry even though Ryanair argued that they would not have brought the application if Mr. Bellew had sought a position with a legacy airline. The case is currently under appeal.

 

In summary, in order for an employer to be able to enforce a restrictive covenant it must be able to demonstrate that the covenant is  fair, reasonable necessary and proportionate.

 

It must protect an identifiable business interest of the Applicant from unjust attack.

 

It must be reasonable in relation to the geographical limits to which it wishes to restrict the employee.

 

It must be reasonable and the test of reasonableness will be assessed with reference to when the contract was entered into.

 

What is very clear from all of the case law is that the Court will not rewrite a restrictive covenant. They will either uphold it or strike it down.

 

Accordingly, it is very important to take legal advice in relation to the preparation of such restrictive covenants and both employers and employees alike should take legal advice at the time when they are proposing to enter into these agreements.

 

For any advice in relation to such matters please do not hesitate to contact any of the employment solicitors in Dillon Solicitors on 01-2960666