Restrictive covenants are contractual provisions purporting to survive the termination of employment and restricting employees in terms of their ability to compete, deal or solicit customers or prospective customers or solicit key staff .They can be a useful tool for employers wanting to protect their confidential information, customer base and workforce following the end of the employment relationship. However, clear and careful drafting is required to ensure that these provisions are not held to be unenforceable as a restraint of trade.
In a recent case the High Court provided some clear guidance on the key considerations in this area. Mr Thornton had commenced employment with his employer in 1997 as a trainee agronomist. The contract of employment issued to him on commencement of employment included the following non-competition provision: “Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area…”.
Mr Thornton left his employment with Bartholomews some 18 years later in December 2015 to work for a competitor. Bartholomews sought to enforce the restrictive covenant in his contract and the matter went before the High Court. The Court held that Bartholomews were not entitled to rely upon the clause to restrict Mr Thornton and that it was unenforceable as an unreasonable restraint of trade. The reasoning behind the Court’s decision can be used as a starting-point for other employers reviewing the likely enforceability of similar contractual provisions. The clause was held to be unenforceable for the following reasons:
- The reasonableness and enforceability of the covenant had to be considered as at the time that the clause was entered-into in 1997. At this time Mr Thornton was a trainee with no prior industry experience or customer exposure. The Court found that the clause was not appropriate or enforceable at this time. The fact that Mr Thornton had, in the following 18 years, progressed to a senior position made no difference. The Court felt that it was bound to judge the enforceability of the clause at the time that it was imposed.
- The restrictions were also found to be unreasonably wide in any event, as they sought to prevent Mr Thornton from dealing with any customer of the Company following the termination of his employment. On looking at the evidence, the Court found that the clients of Mr Thornton represented approximately 2% of the business turnover and it was therefore unreasonable to prevent him dealing with the other 98% with whom he had no direct contact.
- There was also an unusual clause which provided that if a situation arose whereby Mr Thornton was in competition with the Company in the 6 months following termination of his employment, he would be paid by Bartholomews as long as he abided by the terms of the restrictions. They sought to argue that this made the terms of the covenant reasonable. However, the Court held that it was against public policy to allow employers to ‘buy’ a restraint of trade and this was not enforceable. This is an interesting gloss on the position in corporate transactions where it is generally regarded that wider restrictions are sustainable in the context of share sales on the strength of the amount of consideration involved. It also represents a clear rejection of the continental approach to post-termination restrictions where, in many jurisdictions, restrictions will only ever be enforceable if consideration or salary continues to be paid by the ex-employer during the restricted period.
This case serves as a useful reminder of best practice in relation to restrictive covenants and the following lessons can be taken:
- Employers should be cautious not to impose severe restrictions from the beginning of employment and should consider what, if any, restrictive covenants would be appropriate. If an employee is later to be promoted to a more senior role, or one which involves more contact with key customers, it is important for employers to revisit the necessity of restrictions at that time.
- Restrictive covenants should be drafted as narrowly as possible to increase the likelihood of enforceability. In particular, clauses preventing employees from dealing or soliciting customers should be limited to those with whom the employee had direct dealings in a certain period prior to termination of employment. The covenant in this case failed, in part, because the restriction was not limited to customers with whom Mr Thornton had actually dealt.
- In imposing restrictions the employer should give consideration as to what would be reasonable in the context of their actual business and what key areas of protection are required. There is no ‘one size fits all’. In certain industries the key relationship requiring protection may be the one that employees have with suppliers, in other areas of business it will be the pipeline of prospective customers which is key. Covenants should be tailored to the business and to the employee’s role and responsibilities.
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