Restrictive Covenants in Settlement Agreements Explained

What Are Restrictive Covenants?

Restrictive covenants are clauses that limit what you can do after employment ends. The main types are:

Non-Compete Clauses: These prevent you from working for a competitor or running a competing business. For example: "You will not work in any capacity for a competitor of the company for 12 months following termination within a 10-mile radius of the company's offices."

Non-Solicitation Clauses: These prevent you from approaching customers or clients of your former employer. For example: "You will not solicit or do business with any customer of the company for 18 months following termination."

Non-Dealing Clauses: These prevent you from doing business with customers you dealt with. Similar to non-solicitation but sometimes broader.

Confidentiality Clauses: These prevent you from disclosing confidential information about the business, trade secrets, or client information. These are common and often necessary.

IP/Know-How Clauses: These address ownership of intellectual property, designs, or proprietary knowledge created during employment.

The Legal Test for Enforceability

Not all restrictive covenants are enforceable. UK law imposes strict limits. A restrictive covenant is enforceable only if it's necessary to protect legitimate business interests and is reasonable in:

Duration: The time period must be reasonable. General guidance:

• 3-6 months: Usually reasonable for non-competes
• 6-12 months: Increasingly difficult to justify
• 12+ months: Rarely enforceable unless specifically justified

Geographic Scope: The restriction must be limited to areas where the business actually operates. A local business cannot impose nationwide restrictions. An international business might justify wider scope.

Scope of Restricted Activity: The restriction must be limited to genuine competitive threats. Preventing you from working in your entire industry is likely too broad. Preventing you from working for specific competitors is more reasonable.

If a court decides a restrictive covenant is unreasonable, it'll likely be unenforceable. This gives you leverage to negotiate.

Why Restrictive Covenants Matter in Settlements

Settlement agreements frequently include restrictive covenants. This is where many people make costly mistakes. They focus on the cash settlement amount and overlook the career-limiting impact of the restrictive covenants.

Consider this: a restrictive covenant preventing you from working in your field for 12 months might cost you £30,000 in lost earnings, damage to career progression, and retraining needs. Yet many people accept such restrictions in exchange for a settlement that doesn't adequately compensate for this loss.

Your settlement should reflect the value of the restriction being placed on you. A 12-month non-compete should be worth something to you financially. If the employer wants to impose it, they should pay for it.

Negotiating Reasonable Restrictive Covenants

When you receive a draft settlement with restrictive covenants, your solicitor should push back on unreasonable terms:

Duration: Don't accept 12+ months without serious justification and compensation. Push for 3-6 months maximum. In many cases, the employer won't need longer. If they insist, ensure the settlement payment reflects the value of the restriction.

Geographic Scope: If the company operates in three locations, don't accept nationwide restrictions. Insist on geographic limits reflecting actual business operations.

Scope of Activity: A non-compete should list specific competitors you cannot work for, not prevent you from your entire industry. A non-solicitation should apply to customers you personally dealt with, not all customers.

Carve-Outs: Negotiate carve-outs for legitimate reasons. For example:

• You can accept any job not in competition
• You can work in your industry for non-competitors
• You can take employment from specific named companies that pose no real competition

Confidentiality Clauses

Confidentiality clauses deserve specific attention. While employers have legitimate interests in protecting trade secrets and client information, overly broad clauses can improperly silence you.

Your settlement should include explicit carve-outs for:

• Discussions with your spouse, family, or advisors about your departure
• Discussions with legal, tax, or financial advisors
• Disclosures required by law or to courts/tribunals
• Reporting of unlawful conduct or safety concerns
• Making protected disclosures to regulators or whistleblowing contacts

Many modern settlements now include such carve-outs as standard. If yours doesn't, your solicitor should negotiate them in.

Enforceability Issues

Even if you sign a restrictive covenant, remember:

The Burden Is on the Employer: If a dispute arises, your former employer must prove the covenant is reasonable and enforceable. You don't have to prove it's unreasonable.

Courts Are Sceptical: Courts are generally reluctant to enforce restrictive covenants that seem to go beyond protecting legitimate interests. The courts won't enforce them as pure punishment.

Unreasonable Clauses Fail Entirely: If a court decides a clause is unreasonable, it typically won't enforce it at all. There's limited "blue-pencilling" (rewriting) of clauses. This means overly restrictive terms often fail completely.

This doesn't mean you should ignore restrictive covenants. An unenforceable clause still creates legal uncertainty and potential litigation costs. But it does give you leverage to negotiate better terms, knowing the employer knows their position isn't as strong as they'd like.

Compensation for Restrictive Covenants

Here's a principle your solicitor should enforce: if the employer wants to restrict your earning capacity, they should pay for it.

When negotiating, consider:

Garden Leave: Instead of imposing a post-employment non-compete, negotiate "garden leave"—paid time off work where you cannot work elsewhere but are paid your salary. This compensates you for the restriction.

Increased Settlement: If the employer insists on restrictive covenants you're unhappy with, push for increased compensation to reflect the value of the restrictions.

Retraining Support: If restrictive covenants prevent you from continuing your career, negotiate for retraining support or career counselling to transition to permitted work.

Outplacement Services: Negotiate for outplacement and career transition support to help you find compliant employment.

Red Flags in Restrictive Covenants

Watch for these warning signs in draft covenants:

• Clauses longer than 12 months without specific justification
• Nationwide or international restrictions for a local business
• Restrictions on your entire profession rather than specific competitors
• Provisions that would make alternative employment virtually impossible
• Clauses with undefined terms like "related businesses" or "indirect competition"
• Confidentiality clauses that would prevent discussing mistreatment

Any of these should prompt negotiation. Don't accept vague or overly broad terms.

After the Settlement

Once you've signed with restrictive covenants, you're bound by them (assuming they're enforceable). But:

• You can challenge their enforceability if they're unreasonable
• If your former employer breaches the settlement in other ways, this might affect their ability to enforce restrictive covenants
• You can obtain legal advice about proposed new employment to determine if it would breach the covenants
• If you believe a covenant is unenforceable, you can proceed with caution and be prepared to defend it if challenged

The key is not to sign something overly restrictive in the first place. Once signed, your options are limited.