Post-Employment Restrictive Covenants - What are the common mistakes?
It is generally considered difficult for an employer to enforce post-termination restrictions contained in the employment contract, but the subject is often debated.
Typical covenants include:
- non-competition– prevents the former employee working in similar employment with a competing company or business
- non-solicitation – precludes the solicitation of customers, clients and suppliers
- non-dealing – restricts a former employee from dealing with clients, customers and suppliers
- non-poaching – prevents an employee poaching former colleagues
Understandably a company will wish to protect itself from any loss that may follow should an employee act in a certain manner after they leave. However, a balance needs to be struck and often covenants are too far reaching or drafted poorly which makes their enforceability even more difficult.
A one size fits all approach
When a template contract of employment is drafted, it will often include the same set of covenants that apply to all employees, regardless of their role and responsibilities. This is likely to cause problems for employers later down the line as they have not drafted bespoke restrictions which have been considered carefully and applied correctly depending on the seniority of the employee. Many can also be too long in duration, again making them harder to justify and then subsequently enforce. It is important to tailor covenants to the role and think about what information an employee has access to that needs protecting.
Not incorporating the covenants into the contract properly
The best way to ensure restrictive covenants have been incorporated properly into the contract formed between the employer and employee, is to include them in a written statement of terms (usually referred to as the contract of employment) and to require the employee to sign the contract on the first day of their employment. Often employers set covenants out in a separate document such as the handbook or letter but it can raise questions over their incorporation. Also handbooks go to all employees so the covenants will not be tailored and too generic. To avoid doubt and any risk that the employee can argue they did not expressly agree to the restrictions, including them in the contract of employment is most effective.
Issuing covenants too late or without consideration
Sometimes the contract of employment is not issued on the first day of employment, even though it should be; or it doesn't include any covenants as they weren't considered necessary at the time. An issue with someone leaving may prompt a review of the matter or an employee could be promoted to a more senior role and post-termination covenants become very necessary.
Introducing restrictive covenants part way through employment can reduce the chances of enforceability. Whilst employers do not need to assign specific consideration to such clauses if they are contained in the contract of employment and issued at the outset (as consideration is seen as the remuneration and benefits the employee is receiving from day one), thought will need to be given when introducing them at a later date. If an updated contract is issued with new or revised covenants, an employer will need to demonstrate that consideration was provided at the time, such as a pay rise.
A note on non-complete clauses
Non-compete clauses are often included within contracts of employment and they are designed to restrict an ex-employee from commencing work with a competitor for a certain period of time. These clauses are often seen as void as it results in a restraint of trade and is contrary to public policy.
However, if the ex-employer can convince a court that the covenant is designed to protect the legitimate business interests of the employer and that it extends no further than is reasonably necessary to protect those interests; then it can be upheld and enforced.
In the recent case of Law By Design Ltd v Ali the High Court held that the non-competition clause in the service agreement prohibiting the Claimant, a Solicitor, from being involved in any business which was in competition with the parts of the firm that she had been involved in to a material extent in the 12 months preceding termination, was enforceable.
The High Court applied the 4 stage test established in TFS Derivatives Ltd v Morgan which states the course must be decide:
- What it (the clause) means when properly construed;
- Whether the former employers have a legitimate business interest requiring protection in relation to the employee’s employment;
- Once such interests have been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests; and
- Even where the covenant is held to be reasonable the court will then finally decide whether, as a matter of discretion, injunctive relief should be granted having regard to its reasonableness at the time of trial.
The court held that it was an 'uncomplicated conclusion' to reach that the covenant was drawn no wider than reasonably necessary and was therefore enforceable. An injunction was granted and covenant remains in force until its lapse in November 2022.
This case teaches us that there is a place for post-termination restrictions including non-compete clauses which are often considered the most difficult to enforce.