A business often has sensitive information that is vital to its success. This could include business tactics, strategy, pricing or customer and client information. An employer may be understandably concerned that a departing employee will use that knowledge to benefit a competitor once they leave. As a result, they may look to protect this information by including post-termination restrictive covenants in the employment contracts of senior staff.
The enforceability of such restrictions in employment contracts, however, is a hotly debated issue, with many employers and employees believing that they are essentially worthless despite the courts often upholding and enforcing them.
In this guide, we provide an overview of post-termination restrictive covenants, including the common types of restrictions and when such clauses can be legally enforced.
Post-Termination Restrictive Covenants – What are They?
A restrictive covenant is typically included in an employment contract or settlement agreement. These clauses seek to prevent a departing employee from engaging in certain activities after they leave their job, for example, joining a competing company.
Common Types of Post-Termination Restrictions
Post-termination restrictive covenants are classified by the type of protection they aim to achieve. The most common ones are as follows:
- Non-Compete Covenants that restrict the departing employee’s ability to work for a competitor or set up a competing business for a certain time period
- Non-Solicitation Covenants prohibit the employee from approaching the employer’s existing customers, clients or suppliers in an attempt to do business with them
- Non-Dealing Covenants that restrict the former employee’s ability to have dealings with certain customers, clients or suppliers, even if they initiate contact with the employee first.
- Non-Poaching Covenants that prevent the former employee from recruiting or hiring key employees away from the business
- Confidentiality Covenants that bar the employee from disclosing trade secrets or other confidential information about the business or its clients.
Are these Enforceable After Dismissal?
As a general rule, post-termination restrictive covenants are viewed as a restraint of trade and will be void. However, the courts may enforce them if the employer can show that they are reasonable and necessary to protect a legitimate business interest. Legitimate interests include:
- confidential information and trade secrets accessed by the employee during employment
- client, customer and supplier relationships and connections
- workforce stability by ensuring that the departing employee does not encourage key employees to leave.
So, properly and accurately drafted restrictive covenants can potentially be valid, giving employers security that their business interests will be protected. However, such clauses should be narrowly drafted to protect the employer’s legitimate business interest and go no further than this.
If an employer imposes covenants that are unnecessary, overly wide in scope or lengthy in time, the court will not enforce them against former employees, leaving the business exposed.
What Counts As Reasonable Restrictions?
To be enforceable, a restrictive covenant must be justifiable and be no wider than reasonably necessary to protect the legitimate interest. The court will consider the specific circumstances in each case and will take into account the following key factors when deciding whether the covenant is reasonable:
- the duration of the restriction - restrictions lasting more than 6-12 months will be harder to justify
- the geographic scope of the restriction - the wider the geographical area, the harder it will be to defend the clause
- whether the employee received a benefit in exchange for accepting the restriction
- the seniority of the employee and the relative bargaining positions between the parties
- The type of interest being protected - for example, trade secrets may warrant wider protection than customer information and
- Industry standards for restrictive covenants.
Overall, it is important to ensure that any restrictions are proportionate and tailored to the individual employee and the business. This means restrictions should be limited in scope, geography and duration.
Enforcing Post-Termination Restrictive Covenants
An employer can take legal action against former employees to enforce post-termination restrictive covenants. This typically involves applying to the court for an injunction to stop the employee from breaching the covenant or to require them to take specified actions, for example, destroying confidential information in their possession. The court will then evaluate whether an injunction is fair, given the circumstances and its potential impact on the employee, before granting an injunction.
In some cases, an employer may be able to take action against the new employer, such as when the new employer induced the employee to breach the covenants. This approach can be appealing given that the new employer is likely to have greater financial resources than the individual employee.
It is important to bear in mind, however, that going to court is costly, so it is only worth pursuing legal action if the potential harm to the business from the employee’s breach justifies the expense. Additionally, if the court deems a restriction unenforceable, it may strike out the entire provision rather than modifying it to be reasonable. This may leave an employer exposed to significant risks, such as a departing employee being able to immediately join a competing business.
Breaching Restrictive Covenants
Breaching post-termination restrictions can have serious legal consequences. If you are an employee considering such a breach, you must seek legal advice before taking any action.
Your employer may make threats to take you to court unless you stop dealing with their clients or working for a competitor. They may also contact your new employer to inform them that you have breached your covenants and threaten to seek an injunction if your actions are causing them financial harm.
If the employer successfully applies for an injunction, this could result in significant costs to the employee. They would be responsible for covering their own legal fees as well as the employer’s. Additionally, the employer may be able to claim compensation if they can demonstrate sufficient evidence of actual financial loss stemming from the breach of post-termination restrictions.
Restrictive Covenants and Garden Leave
Employment contracts for senior staff often include provisions that allow the employer to place the employee on ‘garden leave’ during their notice period at the end of their employment. During this time, the employee continues to receive their normal pay and benefits but is prohibited from attending the workplace or contacting clients.
The benefit of a garden leave clause is that it prevents the employee from taking up other employment with a competitor during this period. It also means that the employee can no longer access the company’s confidential information.
However, employers can only enforce garden leave if there is an express clause in their employment contract. Such provisions can also be considered a restraint of trade, so the duration should be reasonable and unduly long.
How We Can Help
Post-termination restrictions can play an important role in protecting an employer’s interests after they lose a key employee. However, these clauses must be reasonable in their scope, duration and geography to be enforceable.
Our team of expert dispute resolution solicitors has considerable experience advising on restrictive covenants for both employers and employees. Whether you are an employer looking to safeguard your business or you are an employee needing advice on your own post-termination restrictions, we can provide the specialist guidance you need. Contact us today on 0300 303 2071 or email us.
FAQ
I have just accepted a job, and my new employer has asked me to sign an employment contract containing post-termination restrictions. Can I refuse?
You can negotiate and request that the post-termination restrictive covenants be amended or removed. It’s best to do this straightaway and in writing.
Keep in mind, however, that such covenants are a common feature in many contracts of employment, and your new employer may not be willing to alter them. They may even withdraw your job offer if you refuse to accept the restrictions as presented.
I have been working for my employer for a while, and they are now asking me to enter into some post-termination restrictive covenants. Do I have to agree to this?
You are not obliged to accept these terms. However, if your employer is insistent on them, you may have to carefully consider the consequences of refusing them, especially if you have been employed for less than two years. In such a situation, if you are dismissed for refusing to sign the covenants, you are unlikely to have grounds to claim unfair dismissal.
On the other hand, if you have been employed for more than two years, you could potentially bring a claim for unfair dismissal if you were fired for refusing to sign the restrictive covenants. Whether that dismissal was found to be unfair would depend on the specific circumstances of your case.
I want to resign and set up my own business. Will the restrictive covenants in my employment contract prevent me from doing this?
If your employment contract contains a valid and reasonable non-compete clause, then you may be legally prevented from setting up a competing business after you leave your current job.
It is best to seek specialist advice to carefully review the terms of your contract and determine whether the non-compete clause is enforceable. This will help you understand the potential risks involved before resigning and starting your own venture.
The covenants in my employment contracts prevent me from working for a competitor for 12 months. Is this lawful?
It is usually difficult for an employer to justify a clause preventing you from working with a competitor for up to 12 months. However, such restrictions may be deemed reasonable in certain circumstances, depending on your position in the business, the industry of the business and any geographical limits outlined in the agreement.
Can I negotiate out of post-termination restrictive covenants?
Yes, you can attempt to persuade your employer to waive or vary some or all of the restrictions in your employment contract. The likelihood of success will depend on your role and influence in the business, as well as your potential to acquire clients for a competitor. Employers may be willing to offer concessions on restrictive covenants for high-performing or influential employees.
Is it common for employers to include post-termination restrictive covenants in a settlement agreement?
It is not unusual for employers to include restrictive covenants, such as non-compete or non-solicitation clauses, in a settlement agreement. This is especially true if they consider you a potential threat to their business interests.
Consulting a legal professional is crucial to understanding your rights and obligations under a settlement agreement. It is important to have a solicitor review any settlement agreement you are offered, as they can evaluate the impact of any post-termination restrictions and potentially negotiate a higher compensation amount in exchange for agreeing to those terms.
