Companies need to get it right to protect against competition

  • Posted

Restrictive covenants guard against the passing on of commercially sensitive information about operations and customers by an employee who leaves their role and joins a new employer. However, companies seeking to protect their business through the inclusion of non-compete clauses in the contracts of key employees should draft these carefully with legal input to check that any post-termination restrictions are reasonable.

Whilst the Courts will enforce non-compete clauses, a recent High Court ruling emphasises that restrictions must go no further than necessary in protecting legitimate business interests. The decision also highlights the importance of clearly communicating the terms of any ‘garden leave’ which requires employees to work out their notice period at home.

In Square Global Limited v. Leonard, a broker was contractually obliged to give as six months’ notice period and was subject to restrictions on working for a competitor for six months after his employment ended. When he handed in his notice with immediate effect and left to work for a competitor, his former employer sought to rely on the employment contract to stop him. In response, the broker claimed that he had been constructively dismissed and was therefore released from his obligation to give notice and from the non-compete clause.

However, the High Court found in favour of the employer, stating that the six months non-compete clause was reasonable and went no further than necessary to protect the employer’s legitimate business interests. The Court also decided that the broker was required to serve out his six months’ notice period which, when combined with the six months restriction, would keeping him out of the market for a year.

This contrasts with the ruling in Ashcourt Rowan Financial Planning Limited v Hall, where the High Court held that a restrictive covenant designed to prevent a former employee from working for a competitor for six months was too widely drawn and therefore unenforceable. The terms of the covenant went beyond protecting the legitimate business interests of the employer and was ‘in restraint of trade’.

Employers must ensure that anti-compete clauses and other restrictive covenants are reasonable and focus on activities which would involve the employee directly competing with their previous employer. Garden leave and how or when that might be offset should also be tackled. Fundamentally, any restrictions imposed should be very carefully drafted and tailored to the seniority of the individual concerned.

If you need any advice on drafting or enforcing restrictive covenants, please contact a member of our team.