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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:
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.
We look at several cases to watch out for in 2018 that could have could serious consequences for employers, involving topics such as the gig economy, maternity rights and holiday pay.
The gig economy
For years, the emerging gig economy has raised troubling questions around worker status and worker rights. A string of cases are currently working their way through the courts that revolve around the distinction between workers and self-employed contractors. The distinction is crucial for employers, as the basic employment rights of workers, such as entitlement to national minimum wage and paid annual leave, can prove a burden capable of undermining business models.
These are two of the most prominent cases in this area. Uber involves drivers that are claiming to be workers. They were successful in the Employment Appeal Tribunal (EAT) and we now await Uber’s appeal to the Court of Appeal at some point later this year. Pimlico involves a plumber, labelled as self-employed, that was held to be a worker by the Court of Appeal. Pimlico’s appeal is due to be heard in the Supreme Court later this month. In both cases, the courts have, so far, shown a willingness to dismiss fictitious contractual wording and instead assess the practical realities of the working relationship to determine whether someone is entitled to the enhanced rights of a worker. In recent cases, critical indicators of worker rather than self-employed status have been where the employer has too much control over the way individuals work and if individuals are required to perform work personally, rather than being able to provide a substitute.
Shared parental leave
Shared parental leave has had an underwhelming impact since its high-profile introduction back in April 2015. This has partly been attributed to the fact that there is no obligation for employers that pay enhanced maternity pay to do the same during shared parental leave. As a result, couples that may wish to share the responsibilities of child care, cannot do so for financial reasons as the father cannot afford to take the leave. The case law in this area is conflicting.
The appeal for Capita was heard by the EAT in December 2017 after an employment tribunal (ET) ruled that a male employee suffered sex discrimination when his employer refused to allow him any period of shared parental leave at full pay. The appeal in Hextall was heard by the EAT on 16th January 2018, after the ET held that a policy of giving a period of full pay during maternity leave, but only paying statutory shared parental pay to partners, was not discriminatory. This conflicting approach leaves employers in a position of uncertainty, which we hope will be resolved later this year.
In the UK, pregnancy and maternity discrimination is expressly prohibited under the Equality Act 2010. This protection mainly applies to a specific period of time, known as the “protected period”, which extends from the beginning of pregnancy to the end of maternity leave. In addition, it is automatically unfair to dismiss a woman or to select her for redundancy where the reasoning is connected to her pregnancy or statutory maternity leave.
A pregnant worker only receives protection from pregnancy or maternity discrimination once her employer is aware of the pregnancy. However, in Porras, the Advocate General has given the view that pregnant workers should be protected from the moment they become pregnant, even before they have notified their employer of the pregnancy.
The Advocate General’s opinion is not binding but if it is followed by the European Court of Justice (ECJ), UK employers may find that they have broken the law in relation to pregnancy and maternity, even though they were unaware of the pregnancy at the time. It is hoped that the ECJ will adopt a common sense approach and we await the outcome of this case.
Both of these cases focus on a fundamental aspect of disability discrimination, that an employer must have knowledge of an employee’s disability for disability discrimination laws to apply.
Donelien examines the lengths to which employers must go when investigating whether or not an employee has a disability. Ms Donelien had taken a significant amount of time off with various illnesses. Prior to being dismissed for attendance reasons, Liberata requested an occupational health report that proved to be inconclusive. After returning to the occupational health provider with further questions and unsuccessfully attempting to speak with her GP, the situation was no clearer, so Liberata concluded that she was not disabled and proceeded to dismiss her following return to work meetings. It was suggested that the employer had placed undue reliance on a flawed occupational health report.
The EAT held that the employer had taken reasonable steps, though not all possible steps, to find out whether the employee was disabled and had therefore done enough to avoid having constructive knowledge of disability. The Court of Appeal agreed. It was enough that the employer had not simply taken the occupational health report at face value and had asked further questions and sought clarification. The decision suggests that employers do not need to take every step possible in determining disability to avoid having constructive knowledge of a disability. However, employers should take this as a warning that they cannot blindly rely on occupational health advisers and should seek further information where necessary.
In Gallop the EAT ruled that the dismissal of an employee was not disability discrimination. A key question in this case was whether there can be direct disability discrimination if the decision-maker handling the dismissal is not aware that the employee is disabled. The employee attempted to argue that one employee’s knowledge of his disability (in this case, someone other than the decision-maker that had seen an occupational health report) must be imputed to all employees, including the decision-maker. The EAT considered this misconceived in the context of direct discrimination. The Judge looked at the state of mind and knowledge of the decision-maker and held that an employer could not be said to have imputed knowledge of an employee’s disability where it did not hold all the facts. A further appeal was heard by the Court of Appeal in July 2017 and judgement is awaited.
Sash Window returns to the UK courts this year following a ruling by the ECJ that where an employer has told a worker that holiday will be unpaid, this is liable to deter workers from exercising their right to holiday, and the right to any statutory holiday will carry over, potentially until termination. In this case, an individual had been wrongly categorised as self-employed and had only been offered unpaid holiday by his employer. It was held that he was in fact a worker and was therefore entitled to carry-over the statutory holiday entitlement that he had been deprived of for some 13 years.
This ruling will concern employers that believe they are using independent contractors with no right to paid holiday. We await the Court of Appeal’s decision but the ECJ has potentially opened the door to a barrage of backdated holiday pay claims and has cast doubt on the law around unlawful deductions from wages. Unlawful deductions regulations currently contain a two-year backstop on claims for holiday pay and previous case law has barred claims for historical non-payment of holiday pay where more than three months have elapsed between successive underpayments. It remains to be seen how the Court of Appeal will handle the ECJ’s findings.
The first half of 2018 brings legislative and regulatory changes:
1st April 2018: National Minimum Wage and National Living Wage
The National Living Wage for workers aged 25 or over will increase to £7.83 per hour, alongside various increases to the National Minimum Wage rates, including an increase to £7.38 for 21 – 24 years olds; £5.90 for 18 – 20 year olds; £4.20 for those under 18; and £3.70 for apprentices.
4th April 2018: Gender pay gap reporting
Private sector organisations with more than 250 employees must publish their first reports before this date, with a snapshot date of 5 April 2017 for the calculations.
6th April 2018: Changes to statutory rates of pay
Statutory sick pay will rise to £92.05 per week. Statutory Parental, Maternity, Paternity, and Shared Adoption Pay rates will increase to £145.18 per week. Further, the new rate of a week’s pay for the purposes of redundancy calculations and the basic award for unfair dismissal claims will rise to £508, while the limit on the compensatory award for unfair dismissal will increase to £83,682.
6th April 2018: Taxation of termination payments
All payments in lieu of notice are to be treated as remuneration and subject to tax and national insurance contributions. Previously, employers were able to offer an employee tax-free damages in lieu of their notice period where there was no contractual right to make a payment in lieu of notice.
25th May 2018: General Data Protection Regulation (GDPR)
The existing data protection laws are being replaced. From 25th May, stricter rules will be in force. With fines of up to €20 million or 4% of global turnover, employers must ensure that they understand and are compliant with the new rules.