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Post termination restrictive covenants – what are they and how far can they go?
When an employment relationship ends, employers can sometimes have legitimate concerns that the departing employee will attempt to take clients and other employees with them, especially if they are moving to a competitor.
To mitigate this risk as far as possible, a prudent employer will have ensured that the employee is subject to post termination restrictive covenants in their contract of employment. But what form do these covenants take and how far can they be relied on to protect employers?
This an extensive topic with much case law to consider. However, each case is fact sensitive because the nature of the employment, the drafting of the covenants and the circumstances involved are specific and vary significantly. Most commonly, post termination covenants appear in the contracts of senior employees and those in customer-facing roles. Employers tend to be more concerned that these people will be well placed and have the potential to harm the employer’s business following termination of employment.
Common examples of such covenants include restrictions on being able to solicit customers, poach employees or work for a competitor. These covenants usually last for a defined period following termination of employment. Indeed, some of you may be employers who have inserted such covenants into employees’ contracts or you may be an employee with such restrictions in your own contract.
It may be surprising to learn that these efforts to curtail employees’ activities following the termination of employment are generally void as a restraint of trade, unless the employer can meet certain requirements. Covenants must protect a legitimate business interest that requires such a measure and be no wider than reasonably necessary to protect those interests. Legitimate interests may include customer relationships, trade secrets, and confidential information. However, such matters need to be considered on a case-by-case basis, as what may be a legitimate business interest in one business may not be in another.
Courts will start from the position that covenants are unenforceable as a restraint of trade unless the above test is satisfied and covenants seeking to simply prevent competition will never be enforceable. Therefore, non-compete covenants (where the employee is not allowed to work for a competitor for a period of time following termination) will usually be harder to enforce and are generally the most restrictive covenants available to an employer.
A court will also consider the enforceability of a covenant by examining the position when it was entered into. In the case of an employee who has worked his or her way “up through the ranks”, it will not matter if a covenant that was too onerous at the time they were in their junior role would be considered reasonable once they have progressed to a more senior role. A covenant that was once unenforceable cannot later become enforceable by virtue of the employee’s higher status at the time their employment terminated. Employers should therefore continually review such matters to ensure that any existing covenants are appropriate to the role and seniority of the employee.
Given how closely courts will scrutinise these covenants if ever challenged, careful drafting is vitally important as their enforceability largely depends on it. Employers must determine what legitimate business interest(s) they are seeking to protect. They then need to consider the length and scope of covenants – too long or too wide and they will fail the test set out above. Given the above, it’s always advisable for employers to seek legal advice before entering into contracts purporting to contain such covenants.
We will be running a seminar on restrictive covenants in Nottingham later this year. If you would like to attend, please email email@example.com to register your interest.
Alternatively, if you require any advice or assistance with the issues raised, or any other aspect of employment law, please contact a member of Buckles’ employment team.