Walking the Tightrope of Restrictive Covenants

What Are Restrictive Covenants?

A restrictive covenant is a contractual term of an employment contract that prevents an employee from engaging in certain activities during their employment and after the termination of the employment contract. It encompasses a wide scope of restrictions related to competition, solicitation of clients, suppliers and employees, and confidential information. Some of the most common ones include:

• Non-compete clauses – These clauses prevent an employee from working for a competing business, including their own competing business, for a period of time. They are generally the most difficult to enforce as they are an obvious restraint of trade and can prevent individual from making a living. In fact, certain jurisdiction, like Ontario, Canada, have banned non-competition clauses from employment contracts in all but very specific circumstances. In Bermuda, they are commonly thought to enforceable for professionals and senior executives for time periods of between 6 and 12 months, however this has not been tested by court decisions.
• Non-solicitation of clients/customers – These clauses prohibit solicitation of the services or business of the former employer’s clients, and can sometimes extend to prohibiting dealing with the client at all. Their aim is to prevent the employee from diverting business to a new employer.
• Non-solicitation of employees – These clauses prohibit the solicitation, and sometimes employment, of the staff of a former employer.
• Non-dealing with suppliers – These clauses prevent the employee from retaining the services of a former employer’s suppliers. They are rarer then the various forms of non-solicitation clauses referred to above, as use of a former employer’s suppliers is seldom a threat to that employer’s business.
• Non-disclosure of confidential information – The primary purpose of these types of agreements is to protect sensitive business information from being misused or exploited. Although this is not always considered to fall within the classification of restrictive covenants, it is the most common, and likely most easily defensible restriction sought from employees. It is often included in contracts of even fairly junior employees when confidential information is intrinsic to a business. The definition of confidential information can often be quite broad.

What Can an Employer Do to Increase the Chances a Restrictive Covenant Will Be Enforced?

There are a number of precautions an employer can take in drafting an employment contract to enhance the enforceability of its restrictive covenants. Some of these precautions involve the language of the restrictive covenant clauses themselves. Others include adding provisions to the employment contract that will either make a court less likely to find the covenants void, either as a whole or in part, or will make the employee less likely to breach the covenants.

Limiting Duration, Geographical Scope and Scope of Prohibited Activities

Courts will normally not read down or modify covenants that they would otherwise not find enforceable. In other words, the entire covenant will be found to be unenforceable. For this reason, it is important that restrictive covenant clauses are limited in scope in order to be construed as reasonable. This will be assessed in light of the industry standard and the employee’s role. Courts will look at the following three aspects of restrictive covenants:

• Duration – The time limitations on restrictive covenants must be reasonable. The more senior an employee is, the longer a reasonable duration of a restrictive covenant.
• Geographical scope – A restrictive covenant cannot be too broad in geographical scope and must include only the geographical area in which the former employer competes (although just because the employer does compete in an area covered by the restrictive covenant does not mean the geographical scope is reasonable). The exact breath of an enforceable scope is likely to depend on the business at issue and the other restrictions (in terms of duration and prohibited activities) applicable to the restrictive covenant.
• Scope of prohibited activities – This must not be an attempt to simply prevent an employee from using their own skills and knowledge in their trade or profession after the employment, even if those skills and knowledge were acquired during the employment. Employers therefore often limit non-competition provisions to only the aspects of the business in which the employee worked and non-solicitation provisions only to individual with whom the employee had dealings during a specific period of time before the termination of their employment.

Helpful Additional Contractual Provisions

There is a variety of additions that can be made to employment contracts to increase the likelihood that the restrictive covenants will be enforced. These include the following:

• Independent Legal Advice Clause – These clauses encourage employees to seek legal advice before agreeing to restrictive covenants, making it easier to argue that the employee understood the nature and implications of the covenants. These clauses are likely to be more impactful if the employer covers the cost of the advice.
• Severability Clause – These are clauses that allow restrictive covenants, among other clauses in the contact, to be severed not only from each other, but from the contract, should they be found to be unenforceable. Employers have attempted to be even more intricate with these types of provisions, including clauses that speak to modifications of unenforceable parts of restrictive covenants. As with many other aspects of restrictive covenant provisions this has not been tested in Bermuda courts.
• Restrictive Covenant Clock Starts During Garden Leave – This type of provision sets out that time spent by the employee on garden leave during the notice period is deducted from the duration of the restrictive covenants, making them less onerous. It is fairly common in Bermuda employment contracts that contemplate garden leave.
• Restrictive Covenants to be Disclosed to Potential Employers Clause – Such clauses require the employee to inform any subsequent employer who is considering hiring the employee within the time period when the restrictive covenants are enforceable of the restrictive covenants. This is both a potential deterrent as far as job offers are concerned, and strengthens claims against a new employer if that employer does anything to induce a breach of the restrictive covenants.

Additional Considerations

It is best to enter into restrictive covenants at the beginning of an employment relationship, as the employment of the employee constitutes sufficient consideration for the restrictive covenant. Fresh consideration, such as additional pay, is required if the restrictive covenant is entered into later in the employment relationship. However, it is as an employee becomes more senior and has more influence over the employer’s business, by being exposed to more confidential information and forming more significant relationships with clients, for example, that restrictive covenants become more essential to the protection of the employer’s business. It is therefore worth reconsidering the need for and scope of an employee’s restrictive covenants as that employee’s role changes.

Ultimately, restrictive covenants are difficult and costly to enforce, as doing so usually involves seeking an injunction to stop breaches immediately, and then protracted litigation during which the employer must not only prove a breach of a restrictive covenant, but also quantify the damages that followed from that breach. This enforcement exercise is made exponentially easier when the restrictive covenants at issue are reasonable in all three of the areas discussed above and necessary for the legitimate protection of the employer’s business. Proactively seeking advice from an employment law specialist both when considering incorporating restrictive covenants into an employment agreement and when planning to enforce them is therefore recommended.

First Published in the Bermuda Chamber of Commerce Newsletter (Chamber Insider), August 2025