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Restrictive Covenants Clauses

Restrictive Covenants Clauses

Certain restrictive covenants will be enforceable, if the employer is able to prove that they are:

- reasonable

- necessary to protect legitimate business interests; and

- of a duration no longer than is necessary to protect those interests.

However, restrictive covenants cannot be used as a restraint of trade. If the employer tries to deny an employee the right to make a living in their chosen industry or profession, this will be taken seriously by the court.

The most common restrictive covenant clauses are as follows:

  1. Non-solicitation covenants – these prevent the ex-employee from soliciting the custom of clients of the employer. As a general guide, such a restriction is more likely to be valid if the pool of prohibited clients is restricted to those with whom the ex-employee dealt with personally within a defined and reasonable period immediately preceding the termination of the employment.
  2. Non-dealing covenants – these prevent the ex-employee from dealing with the clients and suppliers of the employer, regardless of whether the ex-employee makes the initial approach. This type of clause is wider than clause 1 above but has similar drafting conditions.
  3. Area covenants – these prevent the ex-employee from working in the same business in which he worked for the employer within a defined geographical area and for a specified period of time. These clauses are particularly difficult to enforce and their reasonableness would be carefully examined. The more defined the area and the shorter the period, the more likely the clause is to be upheld.
  4. Working for a business rival (non-competing) – an employer may seek to protect his business interests by preventing the ex-employee from working for a rival in the trade. Again such a clause must be limited to a reasonable period of time.
  5. Non-solicitation of other employees (non-poaching) – such clauses prevent ex-employees from enticing away his/her work colleagues from his/her former employer. Again, clauses like this must be drafted extremely carefully. Consideration should be given to limiting the clause to employees with whom the ex-employee worked within a defined period of time prior to termination of his employment. Generally speaking, the shorter the period of restraint and the more narrowly defined the clause, the more likelihood there is of the clause being upheld.

If an employee breaches a restrictive covenant clause, the usual remedy is to seek an injunction to prevent breach of the restrictive covenant clause. Such legal action can be expensive, particularly if the court subsequently rules in favour of the ex-employee due to the unreasonableness of the restriction.

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