A recent case from the manufacturing sector serves as an important reminder to agree appropriate restrictive covenants at an early stage in an employment relationship. The term restrictive covenant is usually taken to mean restrictions in an employment contract which prevent unfair competition by the employee after their employment ends.

The company involved in the case - Archcraft Limited - manufactured component parts for windows and conservatories. It was a small company which faced an imminent threat to its ongoing business from existing employees who appeared intent on defecting to a competitor. The production director and the sales director at Archcraft had already left the company to set up a rival firm. Archcraft was understandably alarmed by statements from these former directors that they intended to harm Archcraft’s business.

Worse still, the new company attempted to recruit three more staff from Archcraft. All three (the claimants in the case) had close connections to the new competitor, being the two sons of the former production director, and his son-in-law. Unfortunately for Archcraft, none of the claimants had restrictive covenants in their contracts of employment. Faced with the loss of key employees, confidential information and its customer base, Archcraft therefore decided to bring the issue to a head. It asked the claimants to agree to restrictive covenants preventing competition for twelve months after employment. When the claimants refused Archcraft sacked them. The question was, in these circumstances, were the dismissals fair?

The courts recognise that individuals have a right to earn a living and will only enforce restrictive covenants to the extent that they protect the “legitimate interest” of the employer. Clauses that go further will be void. Employers cannot prevent competition through a blanket restriction on competition. It was exactly this sort of blanket restriction which Archcraft attempted to use in this case.

At first instance, the tribunal which heard the claimant’s complaints of unfair dismissal found that those dismissals had been fair. The tribunal found that the md of Archcraft was reasonably entitled to decide that the claimants’ employment in the firm was not in its best interests.

However this decision was overturned on appeal by the Employment Appeals Tribunal. It said that as a matter of logic, an employer who tries to impose unfair restrictive covenants on employees cannot fairly dismiss employees who then refuse to agree to them.

As a rule of thumb, restrictive covenants cannot normally be imposed for a period of more than twelve months. They should usually be confined to a relevant geographical area and industry. In addition, they should not restrict competitive activities unless absolutely necessary.

The key, therefore, is to scope reasonable restrictive covenants early on in the relationship. For example in the above case, a more modest clause, agreed with the claimants at an earlier stage, could have sought to prohibit them from soliciting their former clients in the same area and industry for a period of six months.

By contrast, the sign or dismiss approach is now much riskier. If a court disagrees that the restrictions an employer tries to impose at a later stage were reasonable, any corresponding dismissal will be unfair. In summary, plan ahead.

Clive Day is a solicitor at Eversheds LLP.