Every company has information, trade connections and other assets that are integral to its success. Failure to properly establish post-termination restrictions at the outset of employment and on an on-going basis can spell disaster for employers and grant ex-employees freedom to damage the business when they leave.
Employers considering imposing post-termination restrictions should consider the following points:-
As a starting point, restrictions are void unless shown otherwise. To be able to restrict an employee’s activities after termination, a considered approach is needed. The contractual terms, if they are to be anything more than a deterrent, must:
- protect a legitimate proprietary interest that it is appropriate to protect; and
- must go no further than is reasonable in the circumstances to protect that interest.
Even if an employee signs on the dotted line, restrictive covenants will not be enforceable if these two conditions are not met.
A restriction must protect a legitimate proprietary interest of the employer, for example, trade connections with customers or suppliers, trade secrets, confidential information and maintaining a stable workforce.
An employer should consider what the most valuable aspects of its business are, for example its talented workforce, its database of clients, its suppliers or its performance in certain geographical areas. This will allow for restrictions to be appropriately tailored.
Once a legitimate business interest has been identified, the protection sought (e.g. a ban on competitive employment or a ban on solicitation of customers) must go no further than is reasonably necessary to guard the interest in question.
This will involve carefully fitting the restriction around the job role of the individual employee depending on their seniority, access to confidential information and trade connections. Employers must also have regard to what is necessary in terms of the restricted time period and the geographical reach of the restrictions. Employees must only be restrained to the extent needed to adequately protect the business interest.
For example, for more junior employees, restrictions that are much shorter in length and narrower in scope might be appropriate, as they are less likely to have access to highly valuable information or trade connections.
If restrictions are found to be unnecessary or unreasonably wide, a court will not enforce them and the employer’s business will be left exposed. In the recent case Egon Zehnder Ltd v Tillman, a six-month non-compete clause (banning the employee from being employed by a competitor) was held to be unenforceable because the phrase “concerned or interested in” was excessively wide. The wording was held to be an unreasonable burden on the employee, as it prevented, for example, the holding of any shares whatsoever in competing businesses.
Another recent case, Capita v Darch, highlights the fact that, in seeking to prevent an employee from soliciting clients or poaching former colleagues, an employer should include reasonable limits. In this case, again, the wording was too wide; the definition of “clients” extended to people the employee had merely been told about, as well as those he had direct dealings with, and the definition of “employees” included people in other areas of the business that the employee had no knowledge of.
A court will judge whether restrictions are enforceable by assessing the circumstances at the time they were entered into, not at the time when the employer is seeking to enforce them. Factors such as the employee’s duties and the parties’ expectations are highly relevant.
Where an employee is promoted, restrictions may need to be adjusted to better reflect the employee’s experience, seniority, pay grade, duties and trade connections or to reflect that the company’s interests have changed.
Bartholomews Agri Food Limited v Thornton underlined the need for restrictions to align with the employee’s circumstances as the employee progresses through the business. An employee joined Bartholomews as a trainee agronomist in 1997. His contract contained a six-month non-compete clause, at a time when he had no industry experience or customer connections. When he left the business in 2016, his employer tried to enforce the non-compete clause. However, despite him having built up almost 20 years of experience at the company, the Court looked at the situation when the restrictions had been agreed in 1997. It ruled that they had been too wide for such a junior employee and were unenforceable.
Breach of contract
Employers who have breached the contract of employment can no longer rely on its terms. An employee put on garden leave, suspended or paid in lieu of their notice period, in the absence of a contractual right to do so, may argue that the employer is in breach of contract.
By including suitable provisions in the employee’s contract of employment, and complying with these provisions, employers give themselves the flexibility to handle an employee’s exit arrangements as they see fit without breaching the contract. Given changes in tax laws, there is now little incentive to omit payment in lieu of notice provisions from a contract of employment.
A cease and desist letter to the ex-employee (and probably their new employer) is often an appropriate first step. Evidence that the ex-employee has breached the restrictions is normally needed for such letters to be effective.
In more serious situations, an employer may wish to apply for an injunction restraining the behaviour of the ex-employee e.g. by stopping them from utilising customer lists or sharing confidential information with a new employer. Injunctions are a temporary solution that precede a full trial but are, in practice, often the end of the matter. Court remedies, such as injunctions, will only be available to employers if they have heeded the principles outlined above and their restrictions are found to be enforceable.