Can a Settlement Agreement include restrictive covenants?

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Restrictions in a settlement agreement

Settlement agreements will often include ‘restrictive covenants’.

A Settlement Agreement can include whatever terms the parties are prepared to agree to regarding the termination of the employee’s employment, including restrictive covenants, which are also known as post termination restrictions. The question is what the parties are prepared to agree to in order to get the deal done.

What is a restrictive covenant?

A restrictive covenant, or post termination restriction, is usually found in an employment contract. It will set out the activities that the employee must not do or get involved with for a given period after the end of their employment. Restrictive covenants are more common in the contracts of senior employees and directors, whose remuneration is higher, and who could do more damage to the business if they were to leave.

Usually, restrictive covenants will prohibit working for a competitor, poaching customers, poaching colleagues, and interfering with supplier relationships.  In addition, there will usually be confidentiality obligations that prohibit disclosure of confidential information belonging to the employer or using it in future.

What restrictive covenants can be included in Settlement Agreements?

Employers will often require a departing employee to “reaffirm” their restrictive covenants in a Settlement Agreement. As the employee has to get legal advice for the Settlement Agreement to be valid, this means the employer can say that the employee understood what those restrictions said. It can also mean that the restrictions are construed in the context of how things stood at the point of termination, not when the contract was entered into.

If the employer isn’t content with the restrictive covenants in the employee’s contract, though, they may try to add new post termination restrictions into a Settlement Agreement.  It’s a matter for negotiation whether new restrictions are agreed, and in what form.  At the very least, we’d always suggest that the employer makes a payment directly in return for the employee agreeing new restrictive covenants – and that this type of payment is made separately from the compensation payment.

This does make the restrictive covenants much more likely to be enforceable, not least because you’ve had legal advice on the terms, but it’s ultimately a commercial decision for you whether the compensation and other payments (like a payment in return for agreeing restrictive covenants), are enough as a whole to persuade you to sign up to the deal and comply with the new restraints.

It may be possible to agree changes to covenants.

Can I negotiate the restrictive covenants?

Each situation is unique of course – sometimes it simply isn’t appropriate to add new restrictions into a settlement agreement and we may advise that we should try to get them removed. But sometimes an employer will feel that it’s totally reasonable to require the employee to accept some restrictions as part of the deal, and therefore they take the opportunity to tailor restrictions to the situation at hand.

If the employer insists on including new restrictions in the settlement agreement, then we’d usually try to negotiate them down to something you can more easily live with, on the understanding that having had legal advice and negotiated the terms of the restraints, they are more likely to be enforceable.

However, it’s usually possible to negotiate the period for which the restrictions apply, and/or agree a list of the customers/contacts they apply to, so as to find a position that both parties can live with (or that they are both equally unhappy with!) and which gives everyone clarity over what is and is not allowed. Alongside agreement over the terms of the restraints themselves, sometimes you’ll find yourself more willing to agree to harsher restrictions in return for an appropriately increased payment, though note that payments made in return for restrictive covenants are taxable.

> Read more about ‘What happens when you leave a company for a competitor?’

Employment Law Solicitor

If you need more help with the subjects covered here then do reach out to our expert solicitors.  You can leave a comment below, email or call us on 03300 020 863.

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