Restrictive Covenants (non-compete clauses) in Contracts of Employment-What You Need to Know

 

restrictive-covenant

Do you wonder how effective a “non compete” clause is in a contract of employment?

When will it not be enforceable?

Let’s take a look at this important topic.

It is widely accepted that an employer is entitled to protect his trade secrets and confidential information in his contract of employment. The Courts have also recognised, down through the years, a common law right to have trade secrets and confidential information protected.

Fidelity and loyalty

Courts will also recognise a duty of fidelity and obligations of loyalty in all employment contracts. This duty has also been held to include an obligation for an employee not to compete with his employer while employed by him.

In Ireland, the EAT has upheld dismissals on this ground of breach of good faith and loyalty. It has also, on occasion, upheld dismissals where the employer had a significant, bona fide concern that this would occur.

Confidential information and trade secrets

An employer does not have to have a specific term in the contract of employment to protect trade secrets and confidential information. However, if there is a dispute, the employer would have to prove that the information he sought to protect was a trade secret or confidentiality must apply to it.

This will depend on the particular circumstances and there is a difference between “objective knowledge”, property of the employer, and “subjective knowledge”, property of the employee.

These rights of the employer must be weighed against the employee’s right to blow the whistle, as whistleblowing is protected in certain circumstances in Ireland, thanks to the Protected Disclosures Act, 2014.

Non-compete after termination of employment

There is no common law restriction on an employee competing with a former employer, or soliciting former colleagues or customers/clients. That is why provision for this should be made in the contract of employment.

There is also a distinction to be made between copying the employer’s customer/client lists-not allowed-and soliciting former customers based on what is in the employee’s head-allowed.

To be clear: there is no common law restriction on an employee soliciting business being done by their former employer.

When are restrictive covenants allowed in a contract?

The law attempts to strike a balance between preventing restraint of trade on the one hand, and, on the other hand, allowing legitimate restrictive contractual terms in a contract of employment.

What’s permitted will depend on

  1. Where the employer has a legitimate interest to protect; a general restriction against competition is not enough.
  2. The restriction must be reasonable and cover activity of the employee while he worked at the employer.
  3. The time period must be reasonable; this will depend on the time needed for the employer to protect the goodwill of the business or limit the damage done by the employee.
  4. The geographical area to be protected must be reasonable; it cannot be too wide if it is more than adequate to protect the employer’s business.

If an employer is in fundamental breach of a contract, or repudiates the contract, he will be unable to rely on a restrictive covenant.

The Competition Act, 1991

The Competition Act, 1991 prevents agreements between undertakings which have as their object or effect the restriction of competition (section 4(1) Competition Act, 1991).

However, employees are not undertakings while working as employees for either their “old” employer, or “new” one.

If they set up a new business, though, in competition with their old employer they will be considered to be an undertaking and any agreement between the employee and former employer will fall within the restriction against restriction of competition in section 4(1).

The leading case in this area is Apex Fire Protection v Murtagh [1993].

One of the useful inferences that can be drawn from the case is that a one-year restriction is acceptable, but anything more than this may be seen as excessive.

The case also shows that a business owned and operated by an ex-employee can be considered an undertaking and, therefore, any agreement will fall within the The Competition Act, 1991.

It also shows that the legality of restraints in any agreement between employer and employee will depend on the particular circumstances of the case.

Any aspect of the agreement that is excessive or unnecessary to protect a legitimate interest of an employer is likely to be unenforceable.

Are you an employer?

Need a quote for a contract of employment? Contact me.

We can supply you with

  1. a template contract which you will complete yourself for each employee. This would involve things like commencement date, job description/role, rate of pay, and any other specific details for the individual employee and/or
  2. individual contracts for each employee-we get all the necessary details from you for each employee and draft the contracts for you.