Post Termination restraints or Restrictive Covenants, as they are also known, aim to protect Companies by restricting the business activities of ex-employees. Such terms are enforceable only if they can be shown to protect the legitimate business interests of the Company. As a matter of public policy, the Courts are reluctant to prevent anyone from earning a livelihood, and hence the clauses are traditionally construed strictly against the Company.
Usual Types of Clauses
- Non Compete – prevents ex-employees from engaging in activities which are in competition with the former employer
- Non Solicitation – prevents the ex-employee from seeking orders and business from existing clients and possibly prospective clients. Such clauses can also be used to prevent ex-employees ‘poaching’ employees
- Non Dealing – prevents the ex-employee from dealing with existing and possibly prospective clients if they contact him/her at the new employment
Requirements of enforceable covenants
When advising whether restrictive covenants are enforceable, it is necessary to consider what a Court may order in the event that proceedings are instituted. The Court will consider all or some of the following matters:
- The intention and circumstances of the parties at the time the covenants were entered into.
- Period of restraint – in general terms, the more senior the employee and the longer the period of service, the longer the period of restraint may be. However, it is unusual for a post termination clause of over 12 months to be upheld regardless of seniority. Any unworked period of paid notice and/or garden leave should be taken into account
- Type of Business – Only clauses that seek to restrain former employees in the area in which they worked will be upheld, regardless of the activities of the Company. For example, if an Electrical Appliance Company with two separate sales divisions, one selling household appliances and the other, selling industrial appliances, wishes to restrict the post termination activities of one of its salesmen from the household appliance section, the Court is only likely to uphold a restriction in the area of household appliance sales in which the employee has worked and not industrial sales
- Geographical Area – a reasonable geographical area would be determined by the employer’s activities, the area in which the employee worked. With the growth of the Internet and global communications, it is not unheard of for restrictions covering the whole of the UK to be upheld
Other factors the Court will take into account:
- Consideration – making a payment to the employee in return for their agreement to enter into the covenant will make the clause more likely to be enforceable, especially if the employee obtained independent legal advice before agreeing
- Status of employee – the more senior the employee, the more reasonable it is to restrain them for a longer period and with a wider restriction
If an employer suspects that a former employee is in breach of such covenants, in any action is to be taken then it needs to be initiated quickly. There are various options open to an employer including issuing proceedings and these should be discussed with your solicitor at the earliest opportunity.
This is an area of law which depends upon the circumstances of each individual case. The Court will examine the circumstances at the time the contract was made in order to determine the intention of the parties and the reasonableness of a restrictive covenant. Covenants drafted too widely tend to be less enforceable, as they do not relate to the specific facts.
As an entirely separate issue, it is important to remember that ex-employees are bound by a duty of confidentiality. It is therefore possible that even if the post-termination restraints are unenforceable, a company can still take action against the ex-employee if it is considered that he or she will be divulging confidential information. The argument normally revolves around whether the information is in fact confidential and therefore capable of protection. This depends upon the nature of the industry and how readily accessible such information is to the public domain. It is advisable in the employment documentation to define what is considered to beconfidential information to avoid uncertainty and confusion later on.