Post-termination restrictive covenants – 6 things you need to know
In the context of employment contracts, a 'post-termination restrictive covenant' is a clause in the contract which seeks to prevent a departing employee from engaging in certain activities after their employment has ended.
These commonly take the form of restrictions on solicitation of and/or dealing with customers, clients, suppliers, other employees of the employer for a defined period of time, or a general prevention on competition with the employer for a defined period of time
The default position is that these covenants are unenforceable
A key point with restrictive covenants is that they are unenforceable as a “restraint of trade” unless the employer can show that:
- it has a legitimate proprietary interest that it is appropriate to protect; and
- the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.
If a restriction does not meet the above tests then the clause will be unenforceable.
What interests can an employer protect?
Restrictive covenants having the sole aim of preventing competition are unenforceable. However, it is well recognised that restrictive covenants can be used by an employer to protect the following legitimate business interests (amongst others):
- Trade connections – an employer can protect is connections with its customers, clients or suppliers and its goodwill. This is the basis for most ‘non-solicitation’ covenants.
- Trade secrets and confidential information – an employer can protect its trade secrets and confidential information. In this context, the courts do recognise that it can be legitimate to stop employees working for competitors, even if the employee is also bound by contractual confidentiality restrictions.
- Stability of the workforce – an employer has a legitimate interest in maintaining a stable workforce. This can be used to justify clauses restricting non-poaching and non-employment clauses in particular.
What counts as reasonable?
In order to be reasonable, the level of protection provided by a restrictive covenant should be tailored according to what is appropriate for the specific employee and the business in which they operate.
In general this means that the restrictions should be limited in scope, duration and geography.
In relation to scope it is often helpful to tie the restrictions back to the employee. For example rather than restricting the solicitation of any employees, a restriction is more likely to be enforceable if it is limited to solicitation employees who that employee had worked with or a certain identifiable category of employees.
The duration of the restrictions is one of the more contentious areas. As a general rule we find that anything over one year is likely to be considered unenforceable.
When thinking about the geographical extent of the restrictions, it is important to bear in mind the relationship between the interest to be protected and the activities of the employee. For instance, if the restriction is designed to protect the business’s local customer base, it will be difficult to justify a restriction that goes further than that local area.
How do these restrictions fit in with garden leave?
Many employment contracts for senior staff allow the employer to put the employee on ‘garden leave’ at the end of their employment (i.e. the employee receives their normal pay and benefits for a period of time, but is prevented from attending the workplace or having contact with clients during that period or is not required to do any work).
Such provisions can also amount to a restraint of trade, so to aid enforceability the duration of the garden leave should also be reasonable. For similar reasons, the duration of any post-termination restrictions is often reduced by the duration of any garden leave.
What can an employer do if an employee breaches their restrictive covenants?
If an employee breaches binding restrictive covenants then they can be sued for the loss that the employer suffers as a result. The employer can also seek an injunction to prevent further breaches or to require the employee to take specified actions (e.g. delivering up and/or destroying confidential information in their possession).
The employer may also consider taking action against any new employer of the employee. They will only be able to in certain circumstances (e.g. where the new employer induced the employee to breach the covenants), but this route can be attractive given the new employer is likely to have deeper pockets than the employee.
Is the law on restrictive covenants likely to change?
The government regards changing the law on restrictive covenants as a possible opportunity to promote innovation. A consultation on measures to reform post-termination non-compete clauses closed at the end of February 2021.
The consultation considered whether there should be mandatory compensation paid to enforce post-termination non-compete clauses or whether post-termination non-competes should be banned entirely.
The aim of the reforms would be to discourage widespread use of non-compete clauses by employers so that individuals have the freedom and flexibility to use their skills to drive the country’s economic recovery. The changes are also aimed at ensuring that individuals receive fair compensation if they are restricted from joining a competitor or starting a competing business within their field of expertise.
California and Israel have both significantly limited (or banned) non-competes; they are both leading innovation hubs. The government is hoping to emulate this in the UK market. It will be interesting to see the results of the consultation; any new laws must of course balance the need for innovation with protecting legitimate business interests and know-how.