It is often the case that the drafting of post-termination restrictions only comes into focus on enforcement. Ideally, however, the careful drafting of such restrictions should be a priority when drafting employment contracts and the rationale for the drafting should be well-documented in the event enforcement becomes necessary in the future. Careful drafting is particularly important as the UK courts have strict rules on the enforceability of post-termination restrictions due to the doctrine of restraint of trade, which provides that a post-termination restriction will be presumed unenforceable unless an employer can show that the clause does no more than is reasonably necessary to protect a legitimate business interest.
We have identified the following five considerations that you should always bear in mind when drafting a post-termination restriction under UK law:
1. The starting point An agreement in restraint of trade that goes beyond what is necessary to protect an employer's legitimate proprietary interests will be deemed void and unenforceable.
2. All or nothing—void means void The UK courts do not approach employee competition litigation in the same manner as they consider a breach of a commercial contract, i.e., a court will not rewrite an unreasonably wide restriction to make it reasonable. In a nutshell, overreaching can have severe consequences. The post-termination restriction should focus on the legitimate proprietary interests that the business is entitled to protect and be limited in terms of reach, scope and duration.
The only exception to this rule is that the courts have the discretion to sever an offending part of a clause using the "blue pencil" test (in simple terms, this means the courts can delete part of a clause if it does not affect the residual meaning). However, you should exercise caution in relying on this approach, not least because of the considerable time and expense involved in litigating these matters in the High Court, with no assurance of success. Any ambiguity in a post-termination restriction should also be avoided as courts will, understandably, be unwilling to uphold a post-termination restriction on public policy grounds in circumstances where the employee is uncertain as to what he or she has signed up for.
3. Three main categories of "legitimate proprietary interest"
- Trade secrets and confidential information
- Customer connections and goodwill
- Stability of the workforce
You should always take care to identify which legitimate proprietary interest you are intending to protect when drafting a post-termination restriction. Often, this is self-evident. For example, a non-poaching clause is intended to protect the stability of your workforce; a non-solicitation clause to protect your customer connections; and a confidentiality clause to protect your trade secrets. You could choose to document this in the employment contract itself or keep an external record.
4. The reasonableness of a restriction will be judged as of the time the agreement was made Employers need to be careful to make sure that post-termination restrictions are suitable for employees at each stage of their career.
If a restriction was unenforceable at the time an employee joined your business as a junior employee, it will still be unenforceable if that employee is promoted to a more senior position within your business.
This often causes problems for employers when dealing with a home-grown talent who, in a rags-to-riches tale, progresses from office worker to CEO. One practical solution would be to reconsider the reasonableness of the restrictive covenant when you offer the employee a promotion and, if it requires amending, making the promotion conditional on the employee entering into new terms.
To assess reasonableness, you need to consider the reach, scope and duration of the particular post-employment restriction as applied to the particular employee. Please find examples below:
- Reach. If an employee works solely for the benefit of the UK branch of your business, and then leaves to join one of your competitors in China, you cannot prevent the employee from working in China, unless he or she will be servicing the UK market from there.
- Scope. Imagine you work in HR for a financial institution. One of your senior equities brokers leaves to join a competitor trading government bonds. The courts could find that a clause preventing the employee from trading a different product would be unenforceable, but the facts must be considered on a case-by-case basis.
- Duration. The typical length of a restrictive covenant is 6 to 12 months. When drafting post-termination restrictions for a junior member of your team, you are unlikely to successfully keep him or her out of the market for 12 months unless there are exceptional circumstances, such as if it is standard practice in your industry (e.g., insurance) or the employee has come into your business with a view to reaching partnership (or the equivalent) within a short period of time. This is another reason why it is so important to document the grounds for imposing post-termination restrictions.
5. Get it right and the weaponry is serious As an employer, you are in a strong position if you have enforceable post-termination restrictions. Well-drafted post-termination restrictions may act as a deterrent to employees against misbehaving. If you suspect a breach, a simple resolution may be to write to the employee and remind him or her of the post-termination restriction, which should put a stop to the unlawful activity.
If this does not work, then the law can step in to help, provided that the post-termination restrictions do not exceed what is reasonably necessary to protect your legitimate proprietary interests.
Evidence is king in litigation, and the first step if your business suspects foul play should be to preserve all (potential) evidence that you have. Technology is usually the first port of call. We suggest you quarantine the laptops, mobile phones and email accounts of any offending employees.
The courts can help you in the following ways:
- The court will have discretion (frequently exercised) to enforce the post-termination restrictions by injunction (interim as well as final)
- A speedy trial may be ordered, which will give you quick resolution of the matter
- The court may also award damages
- The loser normally pays the winner's costs
- The new employer could also be liable for unlawfully inducing the employee's breach of contract.