How tough are your cuffs?
Sophie Banks, a solicitor in Mundays LLP’s employment law team, discusses what employers and employees alike should look out for in their contracts of employment when post-termination restrictions are involved.
Photo copyright: Edhar Yuralaits | 123rf.com
It’s quite rare these days for someone to have the same employer for their entire working life. People leave jobs for many different reasons such as career progression, better pay, family commitments, health issues, redundancy or relocation.
Whatever the reason, employers will often want to ensure departing employees do not use the confidential information they have come across and contacts and connections they have built up throughout employment to damage the employer’s future business interests.
The usual way employers try to achieve this is by including post-termination restrictions (otherwise known as ‘restrictive covenants’) in an employee’s contract of employment such as:
• Non-compete clauses – preventing a former employee from joining a rival employer or setting up a competing business for a defined period after termination (often with a geographical restriction).
• Non-solicitation clauses – preventing a former employee from contacting a customer/client of the employer, or making an initial approach, with a view to obtaining their business.
• Non-dealing clauses – preventing a former employee from dealing with customers/clients of the employer that approach the employee.
• Non-poaching clause – preventing a former employee from soliciting other employees.
Employers can also include restrictions protecting their business from outgoing employees interfering with prospective business opportunities or prospective customers.
It is a common misconception that post-termination restrictions are ‘not worth the paper they are written on’. The legal position is that they could be enforced against an employee if the employer can prove they have a ‘legitimate proprietary interest that is appropriate to protect’ (e.g. trade connections, stability of the workforce or client relationships) and the protection sought is ‘no more than is reasonable having regard to the interests of the parties and the public interest’ (e.g. the restriction is not too long in duration or too wide in scope).
Unfortunately, there is no definitive guidance setting out which type of post-termination restrictions will be enforceable and which ones will not, as this will depend on factors such as the employee’s seniority, the strength of their relationships with key customers/clients and employees, and the confidential information they had access to as part of their role.
Any attempts to restrict an outgoing employee’s freedom to trade must consequently be for a limited time only. An employer will need to consider how long it will be before competitive activities by the ex-employee represent less than a material threat to the employer’s business. This will of course vary, and should be carefully considered for each employee. If the restriction is found to be unreasonably long, it will be unenforceable.
When considering a non-poaching of employees restriction, an employer must consider factors such as how long after termination the ex-employee’s influence over certain employees will remain. Again, if it is found that no such influence exists, or it does but the length of the restriction is unreasonably long, it will not be enforceable against the former employee.
There is also the question of whether an employer would test their enforceability before the courts. Some employers may choose to include restrictions in their contracts to try and deter employees from joining a competitor or poaching staff, but don’t actually take any action against the individual if they do, other than perhaps getting their solicitors to send the employee and their new employer a strongly worded letter threatening legal proceedings.
On the other end of the scale, some employers will take legal action to protect their business interests, most commonly by way of an injunction. However, obtaining injunctions can be extremely costly and time consuming, so an employer will need to weigh up the benefits of such action against the likely damage the employee’s proposed actions could do to the business. If an employer does apply to the court for an injunction, the consequences of an employee breaching a valid restrictive covenant can be severe and costly.
Of course, the best time to seek advice on the enforceability of post-termination restrictions (whether you are an employee or an employer) is at the outset of the employment relationship, before signing any contract.
Perhaps you might have a client following that you are bringing to a new employer and want to ensure that you can still deal with these clients should the new employment relationship not work out? Our specialist employment team at Mundays would be happy to advise on such terms before you sign on the dotted line.
If you have post-termination restrictions in your existing employment contract, it is important you understand their implications, and where necessary take advice if you anticipate they may have an impact upon your next career move. If you are an employer, don’t forget to check the restrictions in the contracts of prospective employees before recruiting them to avoid employing someone who can’t carry out the full range of duties their role requires.
Is a restriction enforceable?
Issues to consider when deciding if post-termination restrictions are enforceable:
• Are they contained in a signed contract of employment or subsequent signed employment document? Employers have been unable to enforce such clauses against individuals when the employee has not signed the contract, or the restrictions are hidden somewhere in the middle of the staff handbook.
• Are the restrictions reasonable in their scope and duration? The employer should impose a restriction that is no wider than reasonably necessary to protect a legitimate interest. This will need to be assessed on an individual basis. A senior employee may have more involvement in, and knowledge of, the employer’s affairs than a junior employee; or two employees on the same level may have differing influences over customers and have varying knowledge of confidential information.
• Is there reference to personal contact? Restrictions should also be limited to those customers, employees etc. with whom the employee has had personal dealings or about whom the employee has had other relevant knowledge in the recent past.
• Are any geographical restrictions reasonable in the circumstances? A clause restricting an employee from working within a ten mile radius could be reasonable for a solicitor that works in a small town, but unreasonable for a banker working in the City of London.
• Has the employee received something in return? If the employee has been asked to sign up to such restrictions at a time later than the start of employment, have they been given any economic benefit in return, e.g. a pay rise? If not, the restrictions may be void.• Has the employer breached the employment contract? If the contract has been breached, the restrictions will not be valid. This often occurs when an employer makes a payment in lieu of notice on termination when they don’t have the contractual right to do so.
Issues to consider if they are likely to be enforceable:
• Could the employee negotiate to be released from the restrictions? Employers may release employees from restrictions in some circumstances, such as in a redundancy situation or to maintain a good relationship with an important client that the employee wants to go and work for.
essence infoMundays LLP
Cedar House, 78 Portsmouth Road, Cobham KT11 1ANTelephone:
01932 590500Website: www.mundays.co.uk
is an experienced employment lawyer with a background in advising large commercial and public sector clients. She provides clear and pragmatic advice to clients to help find solutions that balance both legal and commercial requirements. Sophie deals with all types of Employment Tribunal claims for employers and employees. In addition, she advises on a broad range of employment law issues and documents (such as settlement agreements and contracts), drafts all types of employment-related documentation and presents seminars on a variety of employment law issues.
Sophie can be contacted on 01932 590581