Restrictive covenants: Do you know what you’re signing?

This article is written by Lewis Byford as part of Money Marketing’s brand new hub, Financial Adviser 2B. For more great content, click here.

Do advisers really know what they are signing when it comes to restrictive covenant clauses in employment contracts? This is something we recently wanted to look further into.

We asked advisers the following three questions:

Do you have restrictive covenants in your employment contract?
Did you negotiate those restrictive covenants when joining the firm?
Do you understand what the restrictive covenants in your contract stop you from doing?

The results were fascinating, with just 10% of those we asked saying they would negotiate the clause. The majority did not even realise this could be something up for discussion but advisers have every right to negotiate all parts of a contract.

Before we get on to the whys and hows, I want to point out that 70% of the advisers we spoke to did not understand what the restrictive covenants in contracts actually stopped them from doing.

Here are some of the key terms:

Non-compete: Can stop you from working and earning a living

Non-solicitation: Limits former employees from using confidential information

Non-dealing: Prevents former employees from dealing with former clients or customers, regardless of which party contacts who first

Non-poaching: Stops former employees from taking existing employees away from the business

In some cases, you might find all four of these in a contract, which is really not necessary. For restrictive covenants to be enforceable, it needs to be shown they protect the legitimate business interest – and are no wider than is reasonably necessary to do so.

Most employers believe that the more restricted or tighter the contract, the better the protection. But it can often mean the opposite, as we have seen in many high-profile cases.

So, what exactly should you be looking out for before signing?

Start by considering the time period for the restrictive covenant – it could be six or 12 months, for example – and get to the bottom of why it has been set at this length. Ideally, you want the shortest timeframe possible.

Antony George Blog