This is a question I addressed during my #Property Academy HR Clinic in May 2021.
It arises from a common misconception that they are unenforceable. In fact, legal commentary currently suggests that these types of restrictions are increasingly being upheld.
The reality is that many organisations attempt, often successfully, to enforce restrictive covenants but because they can involve High Court action they are frequently settled out of court and we don’t hear about them.
This means that there is very little case law from which we can learn, and cases are often very fact specific, making it difficult to draw general conclusions – hence the difficulty of being able to give cast iron assurances regarding enforceability.
What are post termination restrictive covenants?
In an employment context they are clauses in an employment contract or settlement agreement that seek to protect the interests of an employer after an employee has left. They can include clauses about:-
- Competition – working for a competitor
- Soliciting customers or suppliers
- Dealing with customers or suppliers
- Poaching staff
How do courts decide whether they are enforceable?
Restrictive covenants need extremely careful drafting, and this is not something you should do yourself. Simply copying and pasting from another employment contract just won’t do.
Here are some of the basic principles :-
- Restrictions need to protect a legitimate interest and go no further than is necessary – so for this reason the shorter the restricted time the better. For instance, it is unlikely that you will succeed in convincing a court that an ex-employee needed to be prevented from working for any competitors for more than 12 months.
- Courts are nervous about non-compete clauses, and may feel that all that is necessary is a non-solicitation clause preventing the ex-employee from approaching your clients.In a 2013 case (East England Schools) a Court decided that customer contacts were protectable even though they were in the public domain. EES specialises in placing teachers in schools and all their potential clients were easily identifiable. Nonetheless, the Court decided that the actual relationships would enable the ex-employee to influence clients away from EES, and this relationship (sometimes described as ‘goodwill’) belonged to her old employer.
- Customer and supplier lists will be regarded as legitimate to protect.
- Restrictions need to be relevant to the employee at the point they agreed them. Restrictive covenants in a new graduate trainee’s contract may not be enforceable ten years later when they become a Director, so get the contract reaffirmed when people are promoted.
- Generally, Courts will take a dim view of blanket covenants in everyone’s contract. The more senior the employee, the more enforceable the covenants. Generally, putting them in everyone’s contract may not be a good idea.
- The geographical extent of a non-compete clause will usually need careful definition. In a notable case (Office Angels) the Court of Appeal decided that a restricted area (within which the ex-employee could not compete) of one mile from the office where the employee worked was an unnecessary restriction. It commented that a non-solicitation clause preventing approaches to clients known to the ex-employee would have been sufficient.
- A court may refer to ‘industry’ standards and may, in particular, decline to enforce a non-compete clause that makes an individual unemployable. An IFA is only likely to secure work with a competitor, and therefore the Court may only be prepared to enforce non-dealing or solicitation clauses in this type of situation.
If I know that I won’t be able to afford to enforce these covenants, are they worth putting in?
Cost is a significant factor here. High Court action is expensive, and usually you have to move quickly to secure an injunction to prevent a breach. Simply waiting until you can prove a loss and suing for breach of contract is probably not a viable approach.
Nonetheless, restrictions can be useful. They can act as a deterrent, can be used as a bargaining tool in termination negotiations, and can dissuade a competitor from inducing an ex-employee to breach the covenants because you can sue them for damages if this can be shown.
It’s also possible to draft a clause that requires an employee to show any prospective employer details of any restrictions they are under, and to tell you of any offer they receive. That might be useful!
Finally, short of Court action, a solicitor’s ‘letter before action’ may be sufficient to dissuade an ex-employee from breaching the covenants.
What should be my next steps?
If you already have restrictive covenants in your contracts, it is worth ensuring that they are regularly reviewed. Constantly changing contracts is not a good idea but reviewing terms at least once every ten years is sensible.
Also, make sure that you only have these covenants in the contracts of employees that could genuinely threaten your interests. Covenants in your receptionist’s contract are probably not a good idea – yes, I have seen them!
If you do not have these types of protection in your contract, take a look at our ‘Protecting your Interests’ checklist. The checklist deals with a wider range of issues that may need considering, including ‘garden leave’ which is probably the easiest way of getting some protection when people resign.
Introducing new restrictions will be a contractual variation which needs either agreeing or enforcing, and it is a good idea (it makes them more enforceable) to pay a consideration to the employee for them entering into new restrictions. Combining the change with an annual pay review, or promotion may also assist with negotiations.
Where do I go for help?
There are a range of resources available for employment law support, particularly for SMEs. This is not an issue that you should be going to ACAS or a generalist ‘insurance based’ provider about. If you are not one of our clients, then you probably need a similar specialist provider or your lawyers.
Ken Allison | 22nd June 2021 | Paradigm Partners | www.paradigmpartners.co.uk
Ken Allison is an engaging trainer and speaker who manages to make his topics, highly interactive, challenging, entertaining, and above all, relevant to the 21st Century executive. Ken uses his understanding of managing businesses to show managers what they ‘can do’ rather than what they ‘cannot do’.
Ken Allison is an expert in HR Employment Law. He combines this with a hands on understanding of managing businesses, to provide clear, no nonsense guidance to people managers as to what they ‘can do’ rather than what they ‘cannot do’. His unique proposition is that he combines a background in line management, corporate HR and personnel, and seven years as Head of HR Consulting for a major law firm, to deliver practical solutions that improve performance.
Ken is also a Trusted Advisor to Property Academy members.
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