Restrictive Covenants on Termination of Employment

Post termination restrictive covenants are often imposed on employees once their employment has come to an end with their employer. This is to protect the employer’s business from any potential harm caused by the employee exploiting any knowledge gained to their advantage in any future employment.

There are four main types of restrictive covenants:

  1. Non-solicitation covenants – this covers approaching clients or customers of the former employer in order to obtain their business.
  2. Non-poaching and non-employment covenants – this covers instances where the outgoing employee wishes to employ, engage or appoint a former employee in their new work, using their influence over the other person.
  3. Non-dealing covenants – this is an extension of a non-solicitation covenant which covers the provision of services. This is harder to enforce and is more likely to arise where an employer can establish a substantial personal connection between the employee and clients, and where the business environment doesn’t make solicitation necessary for the employer to be exposed to a significant loss of business.
  4. Non-competition covenants – this prevents an employee joining a rival employer for a defined period of time after termination of their employment.

 

Enforceability  

For a restrictive covenant to be enforceable, an employer must be able to show:

  • Why it provides adequate protection by showing that it has a legitimate business interest that is appropriate to be protected; and
  • That it doesn’t go further than necessary to protect its legitimate interest.

When determining this, reasonableness, the provision of consideration and the duration of a restrictive covenant are all relevant factors to be taken into account.

Reasonableness

Reasonableness involves limiting the duration of the restriction otherwise the covenant may be too wide in scope and void. The test of reasonableness considers the following principles:

  1. Employment covenants are more difficult to enforce than others due to the relative inequality of bargaining positions between employer and employee;
  2. Reasonableness is to be assessed at the time that the covenants are entered into;
  3. Salary level is not a relevant factor;
  4. Reasonableness is assessed on a case-by-case basis. For example, a senior employee may have more involvement in, and knowledge of, the employer’s affairs; and
  5. The burden is on the employer to demonstrate the validity of the covenants.

Consideration

There is no need for any specific consideration to make restrictive covenants enforceable. Where the covenants are contained in a contract of employment signed at the start of the employment relationship, the employee’s regular salary, benefits and any other remuneration paid by the employer will amount to consideration. If any unusually restrictive covenants are imposed on termination of the employment, an additional sum of money may be provided as additional consideration for departing from the norm.

Duration

Restrictive covenants (apart from those which concern using or disclosing confidential information) must be for a limited time. In deciding the appropriate period, you need 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. The following should be considered:

  1. The length of time it is likely to take for the departing employee’s replacement to settle in and cement relationships with the employer’s customers and clients;
  2. The shelf-life of the employer’s confidential information;
  3. The frequency of contact with clients and longevity of customer connections;
  4. The turnover of staff, length of employee’s notice periods and the state of the recruitment market;
  5. The industry standard for the sector in question; and
  6. Whether the duration of the covenant is no longer than necessary to protect the legitimate interest of the employer

Generally, restrictions that are to last for more than 12 months will be subjected to scrutiny and may not be valid, especially if they are not accompanied by other narrow restrictions.

Post-termination restrictive covenants are becoming increasingly common as they can be tailor made to reflect the parties’ circumstances, prevent the employee from damaging their former employer’s business, as well as deterring employees from joining competitors and potential new employers who may themselves be subject to claims and the courts enforcing the restrictions. However, employers must be careful and ensure that the covenants are drafted properly and are reasonable for them to take effect.

For further information or guidance, please contact a member of our Employment Team who will be happy to assist.

Florence Clissitt

30th May 2018

By |2018-08-24T14:37:11+00:00May 30th, 2018|Employment, News/Blog|Comments Off on Restrictive Covenants on Termination of Employment