If your business relies heavily on the strength of your employees’ relationships with clients or on a particular employees’ knowledge/skills, it’s important to consider what could happen if your employees leave the business.
For example, you may have invested time and money in employing a top sales person and have encouraged them to get close to your clients - but what happens when that person leaves your employment? How can you prevent them taking your clients and lucrative contracts with them when they leave?
Of course, there are practical measures you can take such as ensuring that there is always more than one person in your business who is close to a client so that if one leaves, there’s always the strength of the relationship with the other to rely upon. There are also legal protections you can put in place in the shape of post-termination restrictions in contracts of employment, or “restrictive covenants” as they’re often referred to.
Commonly such restrictions seek to prevent employees from soliciting and/or dealing with clients, enticing employees away from your business and setting up in competition with your business for a specified length of time following termination of employment.
However, it’s not sufficient simply to put restrictions into your employees’ contracts of employment and hope to rely on them. Post-termination restrictions amount to a restraint of trade, which is contrary to public policy and therefore, on the face of it, they are unenforceable. However, restrictions will be enforced by a court if they are reasonable, proportionate and exist to protect a legitimate business interest.
Bartholomews Agri Food v Thornton serves as a timely reminder that post-termination restrictions should be carefully drafted and regularly reviewed. In this case, the High Court ruled that a restriction which was unenforceable when it was first imposed, remains unenforceable regardless of whether the employee is later promoted to a role where it could be regarded as reasonable. In this case, the restriction was in place when the employee first entered the business as a trainee in 1997. At that time he had no experience or customer base; therefore a non-compete clause which prevented him from working with any of the employer's existing customer base for six-months was inappropriate and in restraint of trade. On that basis alone, the restriction was unenforceable. In addition, the Court found that the terms of the restriction were drafted too widely to be reasonable even after the employee's 20-year career. It sought to prevent the employee from dealing with any customer of the employer regardless of whether he had had any prior dealings with the customer. Given that the employee worked with customers who represented only 2% of the company's overall turnover, it would be unfair to prevent him from working with customers representing the other 98% of the employer's existing customer base.
So how can you ensure that your restrictions have the best possible chance of being enforceable? Here are a few tips:
- Make sure contracts of employment containing restrictions are fully signed by employer and employee. It’s extremely difficult to imply restrictions into a contract – much better to have restrictions that are expressly agreed to by the employee via their signature on the contract. Quite often employers are good at sending a contract to a new employee but don’t check that a signed version is returned – diarise to do this to avoid this problem.
- Review restrictions whenever an employee is promoted or takes on a new role within your business. A court will take account only of the position of the employee when they entered into the restrictions when considering whether they are reasonable and proportionate. So, if you employ an individual as a warehouse operative and they end up as your Operations Director, unless you’ve reviewed their restrictions, a court will decide upon whether they are enforceable in light of the employee’s role as warehouse operative. This is bad news for an employer. The promotion of an employee gives you a good opportunity to review restrictions and an employee is more likely to agree to amended restrictions at this time.
- Restrictions must not go any further than is necessary to protect your business interests. Many employers want restrictions to last as long as possible. However, a restriction that lasts for, say, two years, is very unlikely to be enforceable, if the connection between employee and clients is likely to be broken within six months. In such circumstances, a court would be likely to decide that a two year restriction was unenforceable. Better to have a shorter restriction that has higher chances of enforceability than a longer one with much smaller chances. The same applies in relation to the geographical scope of the restrictions. If your business operates in the UK only, it’s unlikely that a restriction that covers the whole of Europe is going to be enforceable.
- Restrictions should be reviewed not just when the employee’s role evolves and develops but also as your products and services change, or the places in which you provide them changes. When your business started, you may have traded only in the UK – five years down the line you may be trading in the USA too – but do the restrictions in your employees’ contracts cover this?
Trying to enforce a post-termination restriction is a costly and stressful process and there’s no guarantee that a court will uphold the restriction (which sets an unwelcome precedent in relation to the rest of your staff). Well drafted and regularly reviewed restrictions mean that it’s much less likely that departing employees will try to breach the restrictions (i.e. they serve as a very useful deterrent) but if you do have to reply upon them, they’re much more likely to be enforceable.
Head of Employment & Holistic HR
For MBM Commercial LLP