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 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.

How Safe is Your Business From This Simple Mistake?

small-business-mistake

Imagine this.

You’ve worked hard to build up a solid base of clients in your hairdressing or beauty salon business.

It hasn’t been easy, but you began to see the fruits of your hard work, long hours, and commitment pay off around 12 months ago.

In fact, it got so busy that you had to take on another hairdresser and, after fielding applications and interviews, you took on Nigel 9 months ago.

Nigel seemed to be the perfect person for the job; he was originally from the area and had spent the last 5 years in Dublin working in one of the country’s top salons gaining valuable experience.

You agreed the main parts of his employment contract-his salary and working hours-and things have gone surprisingly smoothly. You didn’t give him a written contract because you were both happy enough and the real meat of the agreement was how much he would be paid and how many hours per week he would work, and you were agreed on this.

You noticed that he got on great with all your clients and they really liked him.

Last weekend, though, you heard some disturbing news: you were told Nigel was going to set up his own salon on the Main Street in your town. You didn’t believe it at first, but couldn’t help worrying about it because there was a nagging concern in the back of your head.

If it was true, it would not be hard to imagine pulling a lot of your clients with him.

Then you notice a friend of his wishing him well on his new venture on his Facebook page.  You can’t wait any longer and you confront Nigel and put the disturbing rumours to him.

Nigel confirms your worst fears and gives you a month’s notice.

You ring a solicitor with your questions:

  1. Can you dismiss him immediately?
  2. Do you have to give him notice? If so, how much?
  3. Will he have a case for unfair dismissal?
  4. Do you have to pay him if you terminate his employment today?
  5. Can he bring your clients with him?

You’re told that you can dismiss him and, while he is entitled to one week’s notice, he does not have the required 12 months’ service to bring a claim for unfair dismissal.

But you now quickly realise that the most serious aspect of this whole affair is Nigel setting up his new competing business on Main Street, and the danger of you losing a lot of your clients-clients you had spent years acquiring.

And the most stomach churning part of the whole affair?

You now know that if you had a written contract in place from the start of Nigel’s employment you could have protected yourself and your business with a non-compete clause.

This non-compete covenant may have only lasted for 12 months after Nigel left, and it may only apply to a limited geographical area, for example your town or County, but it would have been a huge help, wouldn’t it?

Because if Nigel had to click his heels and wait for 12 months before starting on Main Street maybe he would thought twice about quitting now; and if he couldn’t set up in your town maybe he would have started his business far enough away from you that it would have no impact on your existing clients.

The sad thing is you will never know now because there is no non-compete clause, because there is no contract.

There are plenty of risks involved in running your own business-some avoidable, some unavoidable.

Putting a written contract in place for all your employees is not expensive, and a well drafted one specifically for your needs might even help save your business.

Learn more about drafting an employment contract including a restrictive covenant here.

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.