What are Restrictive Covenants?

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As business owners, you will always have trade secrets, knowhow, client databases, supplier lists and such other information that are key success factors of your business.

Further, you may have employees who are key to your operations. Employees who are involved with business development, marketing and sales are critical to client development and sales of your business’ products or services. Employees who work and are key to ensuring that the business operations are going smoothly will be involved intrinsically in the development of the business know how and trade secrets.

What would be your main concerns if the employee decides to leave? Many business owners would be concerned with the following:

• Loss of clients and key accounts
• Loss of key suppliers
• Loss of other key employees
• Employee setting up his own business in competition

With these concerns in mind, employers included in the employment contracts terms that restrict the ability of ex-employees from:

• Soliciting clients or key suppliers of the employer that the ex-employee had been involved with, for example, in the past 12 months for a period of 2 years
• Restrictions on the type of business the employee could be involved in, for example, the ex-employee cannot set up his own business either directly or indirectly which competes with the ex-employer’s business
• Soliciting of other key employees from the ex-employer for at least, for example, 2 years
• Restrictions on the geographic location that the ex-employee can operate from, for example, cannot operate the same type of business within a 20 mile radius of the ex-employer

These are all examples of the common types of restrictive covenants that you may include in employment contracts. They serve to protect your business from immediate competition from an ex-employee and from the unauthorized exploitation of your know how, trade secrets and all forms of confidential information for such an ex-employee’s benefit for an agreed period of time.

Whether the restrictive covenant is reasonable is often a question of fact and courts will take into account various factors in determining what is or is not reasonable including the seniority of the employee, his position in the business, the duration of his employment and his access to such confidential information.

Should you need us to review any of your employment terms relating to restrictive covenants, do contact us