Following our recent breakfast seminar on Restrictive Covenants, the Employment Department have provided some top tips for employers when considering or reviewing post-termination restrictions for employees.
We need you!
The starting point for a contractual term restricting an employee’s activities after termination is that it is void for being a restraint of trade (in that it restricts the departing employee’s freedom to work for others), UNLESS you, as the employer can demonstrate:
- that the restriction protects a legitimate business interest such as confidential information and trade secrets, trade connections with customers/clients or suppliers and/or the stability of the workforce; and
- that it goes no further than is reasonable necessary to protect that interest.
This must be considered on a case by case basis. Whilst tempting from an administration point of view, there should be no blanket restrictions!
It is therefore important that we understand what damage/harm you want to avoid and what protections you need to enable us to draft restrictions that will help protect your business.
What are the options?
The most common restrictions are those that prohibit an ex-employee from:
- competing with your business;
- soliciting your clients/customers and suppliers (and possibly potential clients/customers);
- dealing with your clients/customers and suppliers (and possibly potential clients/customers); and/or
- poaching your key employees.
Time should be taken to consider what is really needed to protect the Company’s interests. The court can be reluctant to enforce some restrictive covenants, particularly if a less draconian restriction would provide adequate protection. For example, where you may want to include a non-competition clause, consider whether a non-solicitation or non-dealing restriction would suffice.
What is reasonable? Factors to consider…
You must think about the individual requirements of your business and what the employee does within your business. Some of the key factors to consider are:
1. Limit the duration of the restriction. This is particularly important as without a limitation, the covenant will be construed as applying indefinitely and is likely to be deemed too wide by the courts and hence unenforceable. There are a number of questions that you should ask to determine what duration is appropriate. For instance, how long will your information remain truly confidential? How long will it take for an employee’s influence over clients to wane?
2. Restrict the geographical scope by identifying where business is carried out and where the employee works.
Whilst distances as little as 1km have been held unenforceable, the globalisation of commerce can make worldwide restrictions sustainable, (in the appropriate circumstances).
3. Identify and clearly define your ‘business’. Consider what your core activities and products/services are, including what would constitute a ‘competing’ activity which would cause the business harm. In addition, consider which aspect of the business the employee is involved in.
4. Focus on the scope of activities that the employee will be prevented from doing after termination. What do they do when working for you? Widening the scope to stop the employee from acting in ‘any capacity’ may lead to the court finding the covenant unenforceable.
5. Find out what is market practice within your industry or sector.
Timing is key
The court will determine the enforceability of a restrictive covenant at the date the employee signed up to it. If it was not necessary and reasonable at the time the employee entered into it, it does not matter if by the time you are seeking to enforce, it has become necessary/more reasonable because the employee’s duties have changed.
It is therefore important to review covenants throughout employment, particularly where there is a change to an employee’s duties or they receive a promotion. Consider getting the employee to enter into new restrictions when they are promoted to a more senior level.
The Employee must receive some kind of value for entering into post-terminations restrictions for those restrictions to be enforceable. This can include the offer of a job, a one-off payment, certain benefits, a bonus payment or an increase of salary. The value given must adequately reflect what the employee is being asked to sign up to and a link must be made so that it is clear they are being paid for entering into the obligations. Without this the covenant won’t get off the starting block!
Accuracy is paramount
If a covenant is too wide, the court will not rewrite it or introduce appropriate limitations. You should therefore be careful to ensure each covenant is carefully worded and does not go beyond what is reasonable for that particular employee.
We will be holding our second breakfast seminar on restrictive covenants on 11th June - look out for more details to follow.