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Restrictive Covenants

EM Law are experts in drafting and advising on post-termination restrictive covenants in contracts of employment. Our employment law team have partner-level experience from leading City and national firms as well as in-house experience from global businesses. We act for employers as well as employees.

Why impose post-termination restrictive covenants?

Departing employees are often well-placed to take advantage of confidential information, strategic plans, customer and client details or other information about their employer’s business, after the termination of their employment. They may attempt to use this information for the benefit of their new employer, or in order to set up a rival business. This can seriously harm the former employer’s business.

Post-termination restrictive covenants: general principles

When enforcing a restrictive covenant, the court must consider the doctrine of restraint of trade. Any contractual term restricting an employee’s activities after termination is void for being in restraint of trade and contrary to public policy, unless the employer can show that:

  • It has a legitimate proprietary interest that it is appropriate to protect.
  • The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.

Legitimate interest: what can an employer protect?

An employer cannot impose a covenant simply because it does not want an ex-employee to compete with it. However, it can seek to prevent the individual from using or damaging something that legitimately belongs to it. To determine what rights may require protection, the employer must look at the nature of its business and the employee’s position in the business.

In broad terms, the rights that a court will allow to be protected fall into the following categories:

  • Trade connections (with customers, clients or suppliers) and, more generally, goodwill.
  • Trade secrets and other confidential information.
  • Stability of the workforce.

Reasonable protection: no more than necessary to protect the legitimate interest

If there is a legitimate interest to protect, the employer should impose a restriction that is no wider than reasonably necessary to protect that interest. This will involve limiting not only the restricted activities themselves, but also the period and (if appropriate) the geographical extent of the restriction. Failure to do so may result in the covenant being treated as void for having too wide a scope.

In effect, the test of reasonableness requires a balancing exercise to be carried out between the interests of the employer’s business (such as goodwill, confidential information, trade secrets and trade connections) and the individual’s right to freedom of movement and to earn a living. Various general principles have developed as to how the courts will apply this reasonableness test to restrictive covenants in contracts of employment. These are summarised below.

Types of restrictive covenant

Non-solicitation covenants

What is solicitation?

Solicitation in this context usually refers to an ex-employee’s positive act of contacting a customer or client of the former employer or making an initial approach, with a view to obtaining their business.

However, the employee does not always have to make the first move. In Croesus Financial Services Ltd v Bradshaw and another [2013] EWHC 3685 (QB), the High Court held that solicitation may occur even where the customer or client contacts the ex-employee first.

It is generally regarded as acceptable for an employee to inform clients and customers that they are leaving, and even to mention a contact address. However, there is a fine line between acceptable communication and unlawful solicitation.

Customers

There is generally no implied restriction on soliciting a former employer’s customers. However, an employee’s personal influence over an employer’s customers may be dealt with by a covenant preventing the employee from soliciting those customers for a reasonable period post-termination.

Generally, the covenant should be restricted to customers with whom the employee had contact during a specified period before termination. A sensible way to establish the length of this period may be the amount of time that it would take for the employee’s successor to gain influence over the business contacts. Other relevant factors may include:

  • The employee’s level of seniority in the business.
  • The extent of their role in securing new business.
  • The loyalty or otherwise of customers in the relevant market.
  • The length of similar restrictions in the employment contracts of competitors.

Non-poaching and non-employment covenants

Preventing a former employee from soliciting other employees may protect the employer’s legitimate interest in the stability of its workforce.

When drafting any non-poaching covenant, an employer must consider how long after termination the outgoing employee’s influence over other employees will continue, and the scope of the classes of employees over whom such influence will exist.

Attempts are sometimes made to protect employers by including an anti-team move clause, which limits the freedom of an employee to join former colleagues. It is thought that in many circumstances such clauses would be struck out as unreasonable, as they are overly restrictive and contrary to the public interest in allowing employees the freedom to change jobs.

Non-dealing covenants

A restriction on the solicitation of customers can be extended to cover not only enticement or interference (where active steps are taken by the departing individual), but also the provision of services (where no active steps are required: the customer could approach the individual). This is known as a non-dealing covenant. This type of covenant has clear advantages because it avoids the practical difficulty of proving that the individual made an approach. However, it does significantly broaden the prohibition, not only to affect the rights of the employee in question but also those of third parties, so a court is more likely to be cautious about upholding it.

The enforceability of a non-dealing covenant will depend on the interest being protected. Similar considerations as for the enforcement of non-solicitation covenants will generally apply.

Non-competition covenants

A non-competition (or “non-compete”) restriction, which prevents an employee joining a rival employer for a defined period after termination, has traditionally been harder to enforce than a non-solicitation restriction. Nevertheless, the courts have recognised that other forms of protection, such as confidentiality restrictions and non-solicitation restrictive covenants, cannot always be effective in safeguarding a former employer’s legitimate interests.

A non-competition restriction is likely to be enforced in certain circumstances, for example, where the individual’s influence over customers or suppliers may be so great that the only effective protection is to ensure they are not engaged in a competing business in any way.

Geographical restrictions

Geographical restrictions prevent an employee from carrying out activities in a specified area, usually defined as a radius around the former employer’s premises. Generally, the larger the restricted area, the more difficult it will be to justify the covenant.

In assessing the impact of a geographical restriction on the enforceability of a restrictive covenant, relevant factors will include:

  • Whether there is an actual relationship between the interest to be protected and any specific geographical area.
  • The area of activities of the employee.
  • The size, nature and density of the population of the area.

Worldwide restrictions

The courts have always recognised that there are circumstances in which worldwide covenants may be enforceable. However, the employer must be able to demonstrate why such coverage is necessary for the protection of its legitimate interests.

Duration of restrictive covenants

With the exception of restraints on using or disclosing confidential information, any post-termination restrictive covenants that restrain a former employee’s freedom to trade must be for a limited time. When deciding the appropriate period, it is necessary to consider how long it will be before competitive activities by the individual represent less than a material threat to the employer’s legitimate interest. This will vary from case to case and should be carefully considered each time restrictive covenants are drafted.

For any questions you may have concerning restrictive covenants contact Helen Monson or Imogen Finnegan.

Restrictive Covenants Lawyers EM Law Helen Monson     Restrictive Covenants Lawyers EM Law imogen-finnegan

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