For employers, non-compete clauses – also known as post-termination restrictions – and perhaps more commonly ‘restrictive covenants’ are often key sections of the employment contracts they negotiate with employees. When drafted correctly, contractual restrictions are an effective way to protect your brand, commercial goodwill and know-how as well as your valuable customer data when an employee leaves the business. Here we look at how restrictions on employees can be imposed during and after a period of employment.
Restrictions During Employment
In the course of employment, certain restrictions on an employee’s interaction with competitors will normally be implied into the employment contract. This is down to the nature of the employee/employer relationship itself which the law considers is one of mutual trust and fidelity.
Implied terms might include:
- A duty not to compete with the business during the period of employment (for example by working for a rival during employment)
- A duty not to solicit customers of the employer
- A duty not to entice coworkers to leave the employer’s business
- A duty of non-disclosure to stop an employee disclosing private commercial information to third parties. This might include proprietary software or intellectual property
Because these implied terms end when the contract of employment ends (whether through redundancy, dismissal or some other reason) it’s advisable to include express terms about the extent to which an employee can work with or approach competitors after termination.
How Do I Ensure Restrictions On My Employees Will Be Enforceable If They Leave?
Back in 2014, the Court of Appeal in the case of Prophet plc v Huggett emphasised that clauses containing restrictive covenants must always be strictly interpreted. The court’s reasoning was that there must be an assumption that these clauses are drafted with particular care. Both employer and employee should be deemed to have appreciated their importance and effect before signing the contract of employment.
At a basic level restrictive clauses are all about balancing your right to protect your commercial interests with the right of an ex-employee to earn a salary. Bear in mind that when the time comes to interpret a restrictive covenant the employer/employee relationship may well have deteriorated to such an extent that litigation is a possibility. To avoid this and force your employee to comply with the restrictions without risking a costly legal dispute it’s crucial to take care when drafting these clauses.
Restrictive Covenants – Key Principles
Over the years several principles around post-termination restrictions have been established. For example:
- What is the purpose of the clause? A non-compete clause can’t just be about preventing a departing employee from competing with your business. There must be some other reason for the clause. For example, it could be designed to stop an ex-employee from using contacts they built up during their employment to poach business away.
- Is there a legitimate interest to protect? Courts won’t look favourably on a restrictive covenant that purely seeks to prevent an employee from departing the business. The clause must be aimed at protecting some legitimate interest of the employer such as goodwill, intellectual property or business connections.
- Are the restrictions too wide? The restrictive covenant should be comprehensive enough to protect legitimate interests – but note if it is too long in duration or applies to too wide a geographical area a court may be reluctant to enforce it.
Comment
Taken together the principles are all consistent with one overarching idea – that the restrictive covenant must be reasonable in all the circumstances. To avoid the risk and cost of litigation, not to mention the negative impact on existing employees and publicity if a former employee takes you to court, it’s critical to have these agreements carefully drafted by an employment law specialist.
In closing it’s worth noting that in 2023 the government proposed limiting some restrictive covenants to three months, a reform that was met with a mixed response. The government believes limiting restrictive covenants will encourage innovation and generate business. But insiders say limiting non-compete clauses to three months duration could harm established businesses because senior employees could join competitors sooner and divulge high-level know-how to rival businesses within a very short space of time.
Contact Us
For advice on restrictive covenants in employment please contact Shubha Nath at Nath Solicitors on 0203 983 8278 or get in touch with the firm online. We act for a range of businesses as well as individual senior managers, executives, partners and company directors.
