Definition and Types of Restrictive Covenants
Restrictive covenants are agreements restricting competition in employment relationships. The Working Environment Act differs between three different types of restrictive covenants.
Types of Restrictive Covenants
The following restrictive covenants are recognised and may be enforceable under the law:
- non-compete clauses;
- non-solicitation of customers;
- non-solicitation of employees.
A non-compete clause is an agreement between the employer and the employee limiting the employee’s freedom to take up a post at another employer or to commence, operate or participate in other undertakings following termination of the employment.
A non-solicitation of customers clause is an agreement between the employer and the employee limiting the employee’s freedom to contact the employer’s customers following termination of the employment.
A non-solicitation of employees clause is an agreement between the employer and other undertakings preventing or limiting the employee’s possibility of taking up an appointment in another undertaking.
Enforcement of Restrictive Covenants – Process and Remedies
A non-compete clause may only be invoked as far as is necessary in order to safeguard the employer’s particular need for protection against competition. The clause may not in any event be invoked for longer than one year from termination of the employment. In order to be valid, a non-compete clause must be entered into in writing.
The employer may not invoke a non-compete clause after dismissal, unless the dismissal is objectively justified on the basis of circumstances relating to the employee. The same applies if the employer has given the employee reasonable grounds to terminate the employment. The employer may terminate a non-compete clause in writing at any time during the employment.
On written enquiry by the employee, the employer shall within four weeks provide a written statement regarding whether and to what extent a non-compete clause will be invoked. In such cases, the employer’s particular need for protection against competition shall be in the statement.
If the employee resigns and no binding statement exists, the resignation shall have the same effect as a written enquiry pursuant to the first paragraph. If the employer gives the employee notice of dismissal and no binding statement exists, a statement shall be provided at the same time as the dismissal. If the employer summarily dismisses the employee and no binding statement exists, a statement shall be provided within one week of the summary dismissal.
If a non-compete clause is invoked, the employer shall pay the employee compensation equivalent to 100 per cent of the employee’s salary up to eight times the National Insurance basic amount, and thereafter a minimum of 70 per cent of the employee’s salary in excess of eight times the National Insurance basic amount. The compensation shall be calculated on the basis of salary earned during the twelve months immediately prior to the date of notice or summary dismissal. The compensation may be limited to twelve times the National Insurance basic amount.
Deductions equal to a maximum of half the compensation may be made in respect to salary or income received or earned by the employee during the period the non-compete clause is in effect. The employer may require the employee to provide information on salary or income from employment during the period. If the employee fails to comply with this requirement, the employer may withhold compensation until the information is provided.
Non-solicitation of customers
A non-solicitation of customers clause may only apply to customers whom the employee has been in contact with, or for whom he has been responsible during the year immediately prior to the statement as referred to in the third paragraph. The clause may not in any event be invoked more than one year from termination of the employment.
A non-solicitation of customers clause must be entered into writing and may not be invoked unless the dismissal is objectively justified on the basis of circumstances relating to the employee. The employer may terminate a non-solicitation of customers clause in writing at any time during the employment.
On a written enquiry from the employee, the employer shall within four weeks provide a written statement concerning whether and to what extent a non-solicitation of customers’ clause will be invoked. The statement shall in such case specify which customers the non-solicitation of customers clause applies to. The non-solicitation of customers clause becomes void if the requirement regarding a statement is not met.
Non-solicitation of employees
The employer may not enter into a non-solicitation of employees agreement. A non-solicitation of employees clause may nevertheless be entered into in connection with negotiations on transfer of undertakings, and invoked during the negotiations and for up to six months after completion of the negotiations if they do not succeed. A non-solicitation of employees clause may also be entered into from the date of transfer of the undertakings, and invoked for up to six months if the employer has informed all the affected employees in writing.
Use and Limitations of Garden Leave
Garden leave describes the practice whereby an employee leaving a job is instructed to stay away from work during the notice period. If an employee has resigned, or otherwise had their employment terminated, a period of at least one month’s notice shall be applicable to either party, unless otherwise agreed to in writing, or laid down in a collective pay agreement. This means that the employee has a right to remain in his position during the notice period. Note that the notice period is calculated from the 1st in the upcoming month, after the date of the termination. An exception from this rule applies if the employment relationship is terminated when the employee is on a probationary period. If so, the notice period may only be 14 days, counting from the day of the termination. The employer and the employee may agree to disregard the period of notice.
More challenging, are cases where the employer unilaterally wishes to deprive the employee of his right to work during this period. If the right to remain in the position is to be limited by the use of garden leave, the employer has to have “particularly weighty reasons”, which depends on an overall evaluation of the interests of the parties; of particular importance is whether the employee’s right to remain in the position may result in considerable damage. The employee is nonetheless entitled to the same pay and contractual benefits during the garden leave. The employer cannot legally predetermine the use of garden leave. The use of garden leave has to be determined in connection with the situation at the time of the termination of the employment.