The three Rs of post-termination covenants: Restrict, Review and Redraft

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Posted in:Corporate and Commercial|October 31, 2013 | Join the mailing list

As the economic recovery gains pace, there is more and more good news about the jobs market.  Businesses are looking to recruit and employees who perhaps were happy to have a job are starting to look around for other opportunities.  Employers will want
to protect themselves against employees leaving to work for a competitor, taking contacts with them or soliciting clients, customers and employees. 
Nigel Crebbin, Employment Partner at Berg says “Once they are gone it’s too late to do anything about the restrictions.  Now is a good time for businesses to review what (if any)
protections they have versus what they need, because they may not be as well protected as they think.”

Protection is generally sought through including restrictive covenants in employees’ contracts of employment.  These are generally used to stop an employee competing with their former employer’s business, dealing with the organisation’s clients or customers,
and soliciting clients and/or other employees over to a competing business.    

However, just because these clauses appear in a contract, which the employee may have accepted and signed, does not mean that the restrictions will be enforceable and have the effect that you intend.

The starting point when drafting restrictive covenants, or analysing whether existing provisions are enforceable is that such clauses are void (and therefore unenforceable) unless the party seeking to enforce them can show that:

Whether or not those tests are met will, in all cases, be highly dependent on the specific facts and a covenant which is enforceable in one context may not be in another.  The tests will be applied to individual employees separately, and to each separate restriction. 
An employer must, therefore, carefully consider these questions when covenants are being drafted.  The covenants should be tailored to the particular business and to the individual employee in question.  For instance, the type and level of risk to a business
is different with a sales manager than with a finance manager.  Also, what is reasonably necessary to protect a legitimate proprietary interest will be different for a junior administrative assistant than for a senior manager.  In larger organisations, there
may be classes of employees, but generally “boilerplate” or “blanket” provisions will be very difficult to enforce.

However, when post employment covenants are drafted properly and found to be reasonable, they will be enforced by the Courts.  The Courts apply the tests rigorously and quite narrowly, but in a decision reported this month (Coppage and another v Safetynet Security
Ltd) the Court of Appeal upheld the High Court’s decision to enforce a quite widely drawn non-solicitation clause.  The employee (a director) could not, for 6 months after termination of his employment, solicit anyone who had been a customer of the business
at any time during the whole of his period of employment. The Court of Appeal emphasised the importance of the clause’s “overall” reasonableness and found that, with the period of the restriction being “only” 6 months, it was reasonable.

It’s one thing to have well-drafted covenants at the outset of an employee’s employment, but businesses need to regularly review those clauses by reference to the employee’s responsibilities, role and seniority.  Do the restrictions still pass the above tests,
in what might be different circumstances? We reported last year on a High Court decision that the enforceability of covenants depends on whether they were reasonable at the time the contract of employment containing them was
entered into.  Even though the employee in this case had subsequently been promoted since then, the employer could not rely on covenants which were unreasonable at the time he originally entered into his employment contract because of his more junior status
at that time.  

In summary, businesses need to consider including carefully drafted restrictive covenants in new employees’ contracts and also need to keep them under review, especially if a person’s role or level of responsibility develops and changes, or they are promoted. 
Post employment restrictions can be a very useful tool to protect your business, but failing to keep to the above principles can mean that they end up not being worth the paper they are written on.

For more information about any of the above or for practical commercial advice on this or any other aspect of employment law, please contact
Nigel Crebbin of the Berg Employment Team on 0161 833 9211 or email him at nigelc@berg.co.uk.

Follow us at Twitter: @Berg_HR

(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.)

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