As the government considers whether post-termination restrictions in employment contracts unfairly hinder employees from moving freely between jobs or stifle entrepreneurship we examine the current drafting best practice.
In its recent Call for Evidence on non-compete clauses, the government questioned whether post-termination restrictions unfairly hinder workers from moving freely between employers, stifle innovation and/or generally prevent the creation of start-up businesses in the United Kingdom?
The Call for Evidence closed on 19 July 2016 and we now await the outcome of that consultative exercise. The government has said it will take further action if problems are identified, but accepts that there are scenarios where restrictions will remain necessary in business.
Drafting post-termination restrictions
Provisions in employment contracts which prevent individuals undertaking certain activities after their employment with the employer has ended are often referred to as post-termination restrictions or restrictive covenants.
These restrictions take various forms, including restrictions on:
- poaching staff,
- soliciting clients or customers
- dealing with clients or suppliers
So called non-compete clauses which prevent an individual from working for certain other organisations are widely regarded as the most onerous type of restriction because they can prevent someone from earning a living.
Understandably organisations are usually keen to limit the post-employment activities of departing employees, if those employees are senior or privy to sensitive business information.
While such concerns might be legitimate, the courts will not enforce anything more than the minimum restriction considered necessary to protect an identifiable and legitimate business interests of the ex-employer. A broad desire to keep an individual 'out of the marketplace' will not suffice.
The basic principle when drafting post-termination restrictions for an employment contract is that post-termination restrictions will be void and unenforceable for being in restraint of trade unless the employer can show that:
- it has a legitimate business interest that requires protection (for example, its trade connections, trade secrets and confidential information, goodwill and the need to maintain a stable workforce); and
- the protection sought is reasonably necessary having regard to the parties concerned and the public interest.
Essentially this means that the restriction must be no wider than reasonably necessary and must afford no more than adequate protection to the party who imposed it.
Enforcing post-termination restrictions
Whether a post-termination restriction is valid and enforceable will be determined on a case by case basis and is highly fact specific.
The 'reasonableness' of the protection sought by the employer will be assessed as at the point the restriction was entered into, not in light of subsequent events. Factors that will be taken into account will include:
- the job being undertaken and the influence that the employee has, or is foreseen as having, on business relationships and/or trade connections
- the geographical scope of any restriction imposed
- the duration of the restriction, including consideration of how this differs from the length of any contractual notice provisions
In the recent case of Bartholomews Agri Food Limited v Thornton, the Judge held that the restriction in question was not "well drafted" and that, at the point that it was entered into, the alleged protection sought was unreasonable; the employee had entered into his contract of employment and post-termination restrictions when accepting a trainee agronomist role, with no experience in the industry or any customer contacts that would require protection at that time. The court ruled that restricting him from supplying 'goods or services of a similar nature which compete with the company to the company's customers.' was in restraint of trade and unenforceable.
To the contrary, when well-drafted restrictions are imposed, and sufficient consideration is given to those post-termination restrictions at the start of the relevant employment, employers will benefit from the protection sought - as was the case Pickwell and Nicholls v Pro Cam CP Limited.
Drafting tips for employers
- Remember the starting point is that all post-termination restrictions are void and that it is for the employer to show that the restraint sought is reasonable.
- Courts will pounce on any uncertainty in the drafting so ensure that the wording and any definitions used are crystal clear and not open to alternative interpretations.
- There is no such thing as a standard restrictive covenant. Tailor every restriction for the particular circumstances of the employer, the employee and their role and the business in question.
- Consider the likely future reality and what protection will actually be needed.
- Consider what a reasonable duration of restriction might be. For example, what is the shelf life of the confidential information the employee might be privy to?
- Consider whether a garden leave clause would provide the required protection instead.
- Any introduction of new or varied post-termination restrictions should be directly linked to an improved financial package and/or clear sanctions specifically for non-acceptance of those terms.
There are no second chances in this area. Given the crucial importance of getting the drafting right to ensure enforceability, employers would be well advised to invest in specialist advice on post-termination restrictions when appointing key staff or those who may become key in the future.