Post termination restrictive covenants

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Published: 20th June 2010
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Post termination restrictive covenants have long been used as a method of protecting a business or simply seeking to prevent an outgoing employee from being able to compete with the business or work for a competitor. This area is essentially case-law driven and there are a wealth of cases that show the trends of what the courts regard as reasonable and, more often, unreasonable and unlawful.
WHAT ARE RESTRICTIVE COVENANTS?

Employers often incorporate post-termination obligations into an employee's contract of employment whereby an employee agrees not to do certain things after he or she leaves the company. These obligations are called restrictive covenants. They are designed to protect the employer's business and are particularly common in the contracts of employment of sales staff who have access to and intimate knowledge of an employer's customer base, or senior directors and other key employees.

There are broadly four types of restrictive covenant:

1. non-compete covenants - which seek to prevent an ex-employee from directly competing or working for a competitor, usually within a specific geographical area, for a set period following termination;

2. non-solicitation/non-dealing covenants - which seek to prevent an ex-employee from entering into working relationships with former customers, by seeking or accepting orders for goods and services, for a set period following termination.;

3. non-solicitation of employees - which seek to prevent an ex-employee from recruiting former colleagues for a set period following termination;

4. restrictions on the use of confidential information - which seek to prohibit the use of any confidential information (usually identified by a non-exhaustive list of examples) acquired by an employee during employment.

The interests of both parties must be carefully balanced in order to have an enforceable covenant. On the one hand employers will be understandably concerned to protect their business interests. On the other hand some types of restrictive covenants seek to impose unreasonable restrictions on employees which on the face of it would seriously prevent them from operating in the industry in which they are experienced. There are clearly two sides to the argument.
The legal position for enforceability of covenants

Restrictive covenants must go no further than is reasonably necessary to protect their legitimate business interests otherwise the covenants will be deemed to be unlawful restraints of trade and rendered unenforceable. However this fairly simple statement disguises the complex considerations involved in defining what is "reasonable" and what is a "legitimate business interest" in any given circumstance. For example, a covenant which prevents an employee from working for a competitor for a period of six months anywhere within the United Kingdom may be enforceable against a national sales director but would not be appropriate for, say, a hairdresser who only deals with people in the immediate locality. Further, this is not simply an issue about ideas of perceived status. A ten mile geographical restriction might be appropriate for a hairdresser working in a rural area, whereas the same restriction placed on a vet (or indeed a solicitor) working in an urban location might well be unreasonable.

A further example can be found in covenants against the solicitation of former employees. A sales manager might be legitimately prevented from recruiting members of his former team for a period after his employment ends. However, if the restriction extended to all employees, including the office junior, it would be difficult for the employer to argue the restriction was reasonable and went no further than required to protect legitimate business interests.
Leverage for negotiations

The issues that need to be considered in relation to restrictive covenants will vary considerably from case to case and from employee to employee and, as usual employers are advised to seek professional guidance. The point is that covenants can work to protect an employer's business. They provide leverage even if an employer would rather not pursue the matter to a full court hearing or application for an injunction. They can be used as a cornerstone in termination negotiations with ex-employees. Details of the covenants can even be sent to an ex-employee's new employers to place them on notice that any breach of the covenant by the former employee could also give rise to a claim of "inducing a breach of contract" against the new employer. However, the covenant must have, at least on the face of it, some chance of being enforced if it is going to be taken seriously by the ex-employee or his new employers.
The Employee's Perspective

Denying an individual the ability to work and make a living in an industry in which they are experienced and in which they have developed a specific set of skills is not something which would ever be done lightly by the courts. Accordingly, covenants which seek to prevent any form of competition with a former employer are rarely enforced.

Also worth bearing in mind is that if an employer terminates the employment relationship wrongfully, for example, by failing to follow contractual disciplinary procedures or by failing to give due notice under the contract, then the covenants will automatically become unenforceable, whether reasonable or not. An employer may make a payment in lieu of notice but this will not necessarily preserve the enforceability of the covenants, especially where there is no express right to make a payment in lieu of notice under the employment contract.

Where an employee leaves of their own accord the situation is different. However, the covenants still need to be reasonable to be enforceable. For example, a covenant prohibiting an employee from soliciting the business of former customers with whom they were regularly involved is more likely to be enforceable than a covenant which simply prohibits contact with any of the former employer's customers, many of which the employee may never have had contact with.
Conclusion

There are simply no hard and fast rules other than the old maxim - never enter into a contract unless you know exactly what you are agreeing to. Professional advice is therefore a pre-requisite. It is often better to enter into a contract containing draconian covenants which are likely to be unenforceable, than to seek to have the restrictions reduced to the point where they become more reasonable and capable of being enforced.

At the end of it all restrictive covenants are a bit of a game and to get the best results case-law has shown, you need to know the rules.

If you would like any advice on restrictive covenants, or any other aspect of employment law, please visit http://www.cavendishlaw.co.uk or contact Caroline Walker on cwalker@cavendishlaw.co.uk or telephone 0207 147 9974.

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