It is fairly routine for organizations to include restrictive covenants in employment agreements, aimed at deterring employees from engaging in unscrupulous activities that may negatively impact the business. Restrictive covenants have come under judicial scrutiny in numerous countries over the years and questions on their enforceability is a subjective exercise which depends on the facts and circumstances unique to each case.
During the course of employment, an employee may acquire certain skill-sets and be privy to material information critical to the employer’s business. Generally, a sweeping provision that prohibits an employee from carrying out a trade, business or profession is unenforceable. However, an employer may seek to restrain an employee from joining a competitor or from starting a business of its own in an area which directly competes with the employer’s business.
This provision is aimed at deterring an employee from ‘stealing’ the business of a former employer by soliciting it’s customers, clients, vendors or by inducing such former employer’s key employees to join the employee’s business.
This clause is aimed at prohibiting an employee from divulging proprietary confidential information (e.g. business plans, financial accounts, customer details, vendor lists, trade secrets) obtained or accessed by it during the course of employment to unauthorized third parties.
While judicial opinion on the validity of restrictive covenants imposed during the term of employment is fairly settled, opinion on enforceability of restrictive covenants that kick in or continue long after the cessation of employment is fraught with contention.
Nevertheless, some broad parameters have over the years emerged in numerous decisions that lay down the boundaries of what renders a restrictive covenant in an employment agreement invalid. Factors that courts consider include bargaining power of the parties, severity of restrictive covenants in terms of nature and scope of activities sought to be restricted and limitations in terms of geography and duration.