ARE YOU AFFECTED BY A RESTRICTIVE COVENANT IN YOUR CONTRACT?

A restrictive covenant is usually a clause in a contract which prohibits you from providing services to a client directly after initial engagement via an agency, or prevents you from soliciting customers of the client by using knowledge of those customers gained during engagement.

Restrictive covenants are extremely common.  In this article we explain the reason for them and some useful points to bear in mind…

A contract for services differs to that of an employment relationship, where the starting point in a written contract is that all covenants in restraint of trade (i.e. which prevent or restrict a person from plying a trade or otherwise earning a living) are unenforceable as a matter of public policy.  With contracts for services, there is a commercial transaction between one business and another (as opposed to an employer/employee relationship).  The courts take the view that there is an equality of bargaining powers between the parties and are therefore less inclined to intervene.

As we all know, in many circumstances, an agency is involved.  Agencies invest a vast amount of time and money in identifying candidates, and interviewing and selecting a short list for the client to consider.   Should the contractor then proceed to work for the client directly, straight after an initial contract, all of that investment is lost.   This is where the restrictive covenants come into play.

Restrictive covenants are considered to be practical, although the contract will still be subject to the test of reasonableness as required by the Unfair Contract Terms Act 1977 and therefore need to be fair and reasonable.  In using post termination restrictive covenants to restrict a contractor’s activities, an agency would need to demonstrate the following:

- They are seeking to protect a legitimate business interest;
- The restrictions should be for a limited period following the departure. In general terms this should not exceed a period in excess of 12 months;
- The restriction should be limited to a client that the contractor has had a course of dealings with within a specified time frame prior to termination of the contract for services;
- The contract for services has been terminated fairly by the agency and in accordance with the written provisions of the contract.

In some circumstances it is not the contractor, but the client who has an agreement with the agency that is subject to restrictive covenants. The agency may stipulate that the client will not hire contractors that the agency proposes unless the client pays an appropriate introduction fee. This agreement is also enforceable in court but it doesn't affect the contractor directly.   We have, however, seen cases where the client has a lot of influence over the agency and has been able to make arrangements with the agency to allow the contractor to work directly for that client.

The post termination provisions in a contract for services merit close attention prior to the contract commencing. The law in this area is, however, constantly changing and therefore best practice is to carry out a legal review before agreeing to the terms and consider whether the covenants in the contract for services are enforceable.

The Qdos legal helpline is available to give guidance on these issues and if you are a member of our Freelance Club Plus (£40 plus vat) you will be entitled to use our helplines completely free of charge.

It is also worth noting that we now offer a full IR35 & Legal Review for just £195 plus vat.  This is a full report detailing the strengths and weaknesses of the contract from an IR35 point of view, along with a legal overview of the terms and conditions.