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Restrictive Covenants – Protection or a Problem for Employers

Restrictions on Employees:  What the Law Says

Employees are restricted as a matter of general law from disclosing confidential information amounting to a trade secret (for example, a manufacturing process) after termination, and can be made subject to express confidentiality provisions.  

So Why Impose Restrictive Covenants?

Although departing employees are obliged to observe certain terms that are ‘implied’ into every contract of employment, Employers often seek to further protect their businesses by incorporating post-termination restrictions into the contracts of employment of key personnel, which extend to the period after termination of the contract.

These express post termination restrictive covenants typically found in contracts of employment can include:

1)  Non compete restrictions – intended to stop a departing employee from engaging in or with any business activity that is similar to and which competes with their current employer;

2)  Non solicitation restrictions – intended to stop departing employees from soliciting any clients, prospective clients, employees and suppliers; and

3)  Non dealing restrictions – intended to stop departing employees from dealing with clients, prospective clients, employees or suppliers. 

Restraint of Trade

Unless an Employer can demonstrate that it has a legitimate proprietary interest to protect and that the protection it is seeking is no more than is reasonable having regard to the interests of the parties and the public interest, any additional restrictive covenant may be viewed as an unnecessary restraint of trade, and therefore unenforceable.

In light of this, a non-competition restriction has traditionally been harder to enforce than a non-solicitation restriction and is viewed as "the most powerful weapon in the employer's armoury”.  However, a non-competition restriction is likely to be enforced in certain circumstances:

1)  Where it may not be possible to give the legitimate proprietary interest (for example, a manufacturing process or confidential trade secret) sufficient protection through the implied and express confidentiality terms of the contract of employment. For example, as was suggested in Printers and Finishers Ltd v Holloway [1965] 1 WLR 1, it might be inevitable that the employee will use such information in any future employment. A restriction against carrying out the activity is more realistic and easier to police.

2)  Where the individual's influence over customers or suppliers may be so great that the only effective protection is to ensure they are not engaged in a competing business in any way.

However, the courts will closely scrutinise the protection provided by the covenant. In Phoenix Partners Group LLP v Asoyag [2010] EWHC 846 (QB), an employee who was a trader in stock options resigned and, following his notice period but during the operation of a non-competition covenant, started a new job as a broker on the EuroStoxx index. The non-competition covenant prohibited him from competing "with any part of any trade or business carried on by the Company in which the Employee shall have been actively engaged or involved". Discharging an injunction, the High Court held that there was no real prospect that the employee's new job as a broker would be found at trial to have amounted to competition with any part of the business of his former employer. This was because the employee had been the only one who undertook that particular type of work for his former employer: after he left, the employer could not recruit a replacement and therefore ceased to carry on that type of trade or business.

Whilst it is entirely reasonable that an Employer would seek to prevent a departing employee from using or damaging something that legitimately belongs to it, they cannot impose a restrictive covenant merely to stop an ex-employee from competing with them.

Enforcing Restrictive Covenants

Where an Employer believes that an ex-employee is in breach of their post employment restrictions and seeks to enforce them through the courts, they will be obliged to prove to the court that the particular restrictive covenant they are trying to enforce is reasonable.

In TFS Derivatives Ltd v Morgan [2004] EWHC 3181 (QB) the High Court set out the following guidance for assessing the reasonableness of an employment restrictive covenant:

1)  The court must first decide what the covenant means when properly construed.

2)  The court will then consider whether the former employer has shown that it has legitimate business interests requiring protection in relation to the employee's employment.

3)  The covenant must then be shown to be no wider than is reasonably necessary for the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply.

4)  Even if the covenant is held to be reasonable, the court will finally decide whether, as a matter of discretion, the injunctive relief sought should in all the circumstances be granted. In making this decision, the court will have regard to, among other things, its reasonableness as at the time of trial.

5)  If a restrictive covenant applying after employment has terminated is held to be unreasonable, then it is void and unenforceable.

Using Restriction Covenants:  Support for Employers

The law concerning post employment restrictions in contracts of employment is complex and the interpretation and application of the law in this area is subject to ever-changing case law and operational changes within an Employers business, for example when an employee is promoted or changes roles.

If you would like us to review your current contractual arrangements and advise on the suitability and likely enforceability of existing restrictive covenants, and/or assist you to incorporate appropriate restrictive covenants into new or existing contracts of employment, give us a call today on 0800 612 4772. If you require employment law advice on a tricky staff issue give us a call today on 0800 612 4772.  You can also find out more about our fixed fee HR packages here and fixed fee employment law packages here, or get in touch.

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