News and Updates

Limits on post termination restrictions

When drafting contractual post termination restrictions, employers want blanket coverage.  Outgoing employees should be prevented from competing, from poaching any client and any employee, ideally for as long as possible. 

But restrictions of such wide scope will never be enforceable.  Whilst the general rule is that the literal wording of an employment contract sets out the obligations of the parties, there are common law boundaries on how far an employer can go to prevent a departing employee from trading in the same space.

The default position is that any contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to public policy, unless the employer can show that:

  • it has a legitimate proprietary interest that it is appropriate to protect.
  • the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.

The requirement that the protection sought should be reasonable means for example that covenants should be limited in time scale to a period in which damage could be done; should be limited in geographical scope to areas where the employer and employee are active; should be limited in terms of clients to those that the employee has or is expected to have influence over or valuable information about; and limited in respect of employees to those with whom the employee has contact and whose departure would be a detriment to the employer.

In addition, the following points should be noted:

  • Restrictive covenants having the aim of preventing competition per se are not enforceable.  If a legitimate business interest of the employer can only be protected by a non-compete clause or the only way of preventing the employee from gaining an unfair advantage is such a clause, then enforcement may be possible.  But if a well drafted clause preventing solicitation of and dealing with clients for example, would have adequately protected the business interest, a non-competition restriction is unlikely to be valid. 
  • The reasonableness of a restrictive covenant is judged at the time it was entered into.  If it was not reasonable at that time, but becomes reasonable at the time of termination, it is still unenforceable.  Covenants should be regularly reviewed to avoid this eventuality.
  • A court will not rewrite a covenant or imply wording to make it enforceable.  The best it may do is delete words to remove an unenforceable portion leaving behind a valid provision, if that is possible in the circumstances. 
  • The employer is responsible for proving that the covenant that it wishes to rely on is reasonable.
  • To be legally binding (and assuming the covenant is in itself reasonable in the first place) the employee should expressly accept the covenant and receive consideration in exchange for acceptance.  It is debatable whether continuing employment is sufficient for this purpose when covenants are introduced during employment.

The recent High Court case of Bartholomews Agri Food v Thornton (2016) serves as a reminder of the difficulties inherent in enforcing post termination restrictions.

In Barthlomews, the employer provided goods and services to the agricultural sector.  The employee was an agronomist, providing advice to the employer’s clients on matters such as crop choice, planting, rotation, nutrition and soil condition.

The employee had entered into a contract when first employed in 1997 which contained the following clause:

Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area, (which is West and East Sussex, Kent, Hampshire, Wiltshire and Dorset) or on their own account without prior approval from the Company. In this unlikely event, the employee’s full benefits will be paid during this period.

The employee had resigned and his intended end date was in March 2016.  He wished to join a competitor.  The employer sought to prevent him by applying for an injunction to restrain breach of the clause set out above.  The High Court held the clause was unenforceable because:

  • the employee was a trainee when the clause was entered into and its terms were "manifestly inappropriate" at that time.  On that basis alone the clause was unenforceable.  The fact that he had been subsequently promoted to a role where the terms may have been reasonable was irrelevant. 
  • it was far wider than reasonably necessary to protect the employer's business interests. It applied to all customers regardless of whether the employee had any knowledge of them, or had carried out any work for them.
  • the employee's customer base accounted for only just over 1% of the employer's turnover. The remaining customers with which the employee had no dealing generated over 98% of turnover.
  • it contained no definitions clause (and was generally poorly drafted) so it was uncertain what phrases such as "of a similar nature" meant.
  • the offer to continue to pay the employee for the duration of the post-termination restriction was contrary to public policy.  Being paid to abide by a covenant will not render an unenforceable covenant enforceable.

The Bartholomews case demonstrates that in order for an employer to maximise the protection for its business that can obtained contractually after termination of employment, it must give careful consideration to the scope and content of post termination restrictions at the outset of employment and at regular intervals thereafter, seeking updating variations when appropriate.  Freedom to contract in this area is substantially restricted by considerations of enforceability.

In related news, in April 2016 the government announced a call for evidence on whether post termination restrictions in employment contracts act as a barrier to employment, innovation and entrepreneurship.  The information gleaned was to be used to develop the government’s National Innovation Plan, which is intended to “make Britain the best place in Europe to innovate and start up a new business”.  Further information is available here.

For further information on the issues raised in this article, please contact us on 020 7925 8080 or by email at info@spencer-wyatt.com.

 

+44 (0)20 7925 8080 info@spencer-wyatt.com