Are your post termination restrictive covenants worth the paper they are written on?

News - 27/07/2016

It is common practice for employers to include restrictive covenants in employees’ contracts of employment, particularly for senior and highly skilled workers with access to the company’s confidential information and those in client facing roles. The purpose of restrictive covenants is to restrict employees’ activities for a specific period of time once their employment terminates in order to protect the legitimate interests of the business such as its client data base and confidential information.

Common types of restrictive covenant clauses include:

• Non-compete – preventing an employee from working in competition with the business.
• Non-solicitation – preventing an employee from approaching your clients/customers/prospective customers/suppliers with a view to doing business with them.
• Non-dealing – preventing an employee from doing business with clients/customers/prospective customers/suppliers, regardless of whether the employee approached them or vice versa.
• Non-poaching – preventing an employee taking former colleagues to new employment in order to further protect the company’s business interests.

Common errors  

A major and common pitfall is when employers have employment contracts (or even employment handbooks) which include the same restrictive covenants applicable to all their employees, from junior to management level. These may be reasonable for some employees but wider than reasonably necessary for junior employees who do not have contact with clients or knowledge of confidential information.

Even if restrictive covenants are considered to be enforceable when an employee’s employment is terminated, if they are unreasonable at the time they are entered into, they are likely to be unenforceable.

It is important to review and update restrictive covenants when an employee is promoted, receives a pay rise or if there is a change in their role.

The recent case of Bartholomews Agri Food v Thornton [2016] highlighted some of these issues. Mr Thornton was a trainee agronomist who gave agronomic advice to farmers and land owners on soil condition etc. He did not have any experience or his own customer base with whom he worked at the time when the restrictive covenant clause was entered into. Yet his contract included a non-compete clause preventing him from working with all of the company’s customers for six months following the termination of his employment. Whilst the clause might have been enforceable if entered into at the time when Mr Thornton resigned, the High Court held that it was unenforceable because:

• He was only a trainee when the clause was entered into and its terms were “manifestly inappropriate” for a junior employee as he had no experience or customer base at the time, and
• It was drafted too widely as it tried to prevent Mr Thornton from dealing with all customers regardless of whether he had any dealings with them.

There was also a contract clause which stated that Mr Thornton would be paid during the period of the restrictions after his employment ended, as long as he did not breach them. The High Court considered that it was contrary to public policy and interest to allow an employer to ‘purchase’ a restrictive covenant.

It is therefore very important for your business to have well drafted restrictive covenants to protect your business interests.

If you want to ensure your restrictive covenants are worth the paper they are written on, please contact your usual adviser in the employment team

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.

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