Tuesday 22 August 2023

What is a Restraint of Trade Clause in Employment Contracts?

Original article by Comfort Nkang, Practice Leader, LegalVision.

When you have employees or workers carrying out roles within your business, you effectively expose them to information and contacts which are precious to your business. You may, therefore, at times feel it appropriate to put limits on how they can use that information. Such limits may be relevant when an employee is carrying out their role and once they leave your business. A common method for doing this is through a restraint of trade clause in your employee’s employment contract. However, if you feel this is necessary, you should ensure you do so in a way that is legal. The law around the restraint of trade is difficult to understand and changes rapidly. 

This article will explain what restraint of trade is and how it can apply to employment contracts. It will explain when restraint of trade clauses are legal and their enforceability in the UK.

What is a Restraint of Trade?

A restraint of trade restricts a person in terms of using their trade and skills as they wish. Restraint of trade is generally illegal unless the restraint complies with any legal exceptions.

You can find restraint of trade clauses, for example, in commercial contracts. Likewise, you can find them in employment contracts where they affect an employee’s ability to work for or trade with a competitor’s business.

What is a Restraint of Trade Clause in an Employment Contract?

A restraint of trade clause is a contractual term within an employment contract that restrains an employee or worker from taking certain actions. For example, a clause may prevent an employee from working with a competitor’s business once their employment ends. It can affect an employee’s conduct both whilst working for you and once they leave.

A restraint of trade clause is often known as a type of restrictive covenant. Restraint of trade clauses are considered to be stricter in employment contracts than commercial contracts.

For example, you may include a restraint of trade clause to ensure that they do not use information gained whilst working for you for the benefit of another competitor’s business.

Is a Restraint of Trade Clause Legal?

If you include a restraint of trade clause in your employee’s employment contract, a court would ordinarily consider it void. This is on the basis that restraint of trade is generally not permitted and is at odds with public policy unless certain requirements are met.

You can include a restrictive covenant in the employment contract, which is a form of restraint of trade. In doing so, you must be able to show that the clause is necessary to legitimately protect your business interests.

This could be, for example, to protect your trade connections in terms of your suppliers or your customers. It might also protect confidential information or keep your workforce stable.

To decide what might be a legitimate interest of your business, you will need to consider what your business does and what your employee’s position within it is. Importantly, restrictive covenants cannot simply be in place to stop competition for your business.

Key Considerations Before Including a Restraint of Trade Clause

Additionally, when including a restrictive covenant in your employee’s employment contract, ensure that it is not unnecessarily wide. This means the clause cannot be wider than necessary, bearing in mind the interests of you and your employee and the public interest.

Ultimately, the restraint of trade clause must be reasonable. The reasonableness of it depends on the interests of your business, your employee, and the public. Likewise, a court will look at reasonableness from the beginning of the contract rather than any events occurring afterwards.

Notably, courts rarely consider restraint of trade clauses in employment contracts to be reasonable. This is primarily because you and your employee do not have equal positions to bargain in the employment contract.

So, if you decide to include restraint of trade clauses in the form of restrictive covenants in your employment contracts, you must word these very carefully. You should also detail the interest it protects as part of the clause. This is because when determining whether the clause is valid or not, courts will examine this interest. Importantly, you cannot later claim the relevance of other interests not in the employment contract.

How Can I Enforce Restraint of Trade Clauses?

Whilst you may include a restraint of trade clause in your employee’s employment contract, an ex-worker may decide to ignore it. This leaves you with the difficult decision of whether to enforce it.

The law surrounding enforcing restraint of trade clauses in employment contracts is very much dependent on the individual circumstances of each case. Indeed, there are no rigid rules. It is also difficult to enforce restraint of trade clauses in employment contracts compared to commercial contracts. As stated, there is a lack of equality between you (as an employer) and your employee when bargaining the terms of the contract. 

Additionally, it may be possible to take out an injunction on your former employee. An injunction from a court gives your former employee an order to stop them from doing something, like working for a competitor’s business. Alternatively, an injunction can order an employee to do something they have not done, such as give back confidential software before leaving a business. However, it is up to a court to decide whether they believe an injunction necessary.

Finally, it may also be possible to seek compensation from an employee who has not abided by a restraint of trade clause. Importantly, you must prove that your business suffered a loss due to the employee’s breach of the restraint of trade clause. 

Key Takeaways

Restraint of trade is generally considered illegal. However, it can be lawful when it meets certain legal exceptions. Indeed, a restraint of trade in employment can be legal by correctly using restrictive covenants in the employment contract. These can affect your employees’ actions during and after their employment with you. However, there are very strict rules in place to determine the legality of restrictive covenants, such as their reasonableness of them and what they can protect. Also, restrictive concepts can be difficult to enforce.  

If you need help understanding the restraint of trade in the UK, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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