Restrictive covenants (sometimes known as post-termination restrictions) are increasingly found in a range of employment settings as a means of protecting businesses from harm when a trusted employee with knowledge of sensitive information goes to work for a competitor.
Post-termination restraints can be used to ensure non-solicitation and other types of restrictions in order to protect the business.
In this article, we'll take a closer look at restrictive covenants and the things that employers need to know about post-termination restraints to protect their business.
Post-termination restrictions are common in many sectors but are often used in sectors that rely heavily on personal connections and reputations, such as recruitment, to protect agencies when their employees leave to join a competitor or to set up their own business.
These terms of restriction are aimed at minimising the risks of skilled or senior employees taking specific knowledge, insight, networks or intellectual property (“IP”) with them to a competitor.
The starting point is that post-termination restrictions are void on public policy grounds if they essentially prevent an individual from earning a living.
They can be enforced if they are carefully drafted and go no further than is reasonably needed to protect a legitimate business interest.
However, post-termination restrictions can often be difficult to enforce, particularly if they haven't been drafted in line with the particular circumstances of the employee’s role, latest guidelines and cases.
One particularly important aspect of a successful restrictive clause is that it must be tailored to the business in question, time-bound and periodically reviewed and restated.
Generic, ongoing clauses are unlikely to be enforceable, although may still offer some deterrent value.
These steps will help to ensure that any restrictive covenants that you write into your employment contracts are enforceable:
Any post-termination restrictions in a contract must be limited to the absolutely necessary limits to protect the business's legitimate interests.
These are severe restraints, intended to prevent departing employees from taking confidential data to the marketplace in some way and are designed to protect the business's legitimate interests.
The key word here is legitimate.
For example, the Supreme Court ruled that a six-month post-termination restrictions clause was excessive in restraining a former employee from taking any ownership in a competing recruitment business (Tillman v Egon Zehnder).
The general rule is that courts will take a cautious view when considering these types of contractual restrictions.
One good practice for businesses is to limit these types of restrictions to the most influential, knowledgeable, and senior employees within the business, who could easily leverage their knowledge in the competitive marketplace.
In recruitment, the most common post-termination restrictions relate to non-solicitation and non-dealing requests.
These can only be enforceable if they have a clear scope and a time period.
For example, a departing consultant could be prevented from dealing with a candidate that they have engaged with in the past year.
Berry Recruitment v Donovan is a good case study for this.
There can be no absolute guarantees about post-termination restrictions, and the issue of whether they are enforceable will always come down to a case-by-case analysis.
The courts judge the restrictions from the date of contract signing.
This can mean that their relevance becomes outdated as the individual progresses through the business.
For this reason, it's worth updating post-termination restrictions at regular points in the employee's lifecycle or checking and reaffirming existing clauses.
Consider too notice periods and whether any other express obligations need to be added, such as for information disclosure and the necessity to act in the best interests of the business in all instances.
These are general contract good practices, but they require a current and in-depth knowledge of employment law.
It is also important to note that if you are asking an employee to agree to new restrictions, it is generally necessary to give them something in return (known in law as “consideration”), which will typically be money.
Post-termination restrictions can be highly effective tools to protect your business interests, but if they are not properly drafted, they may be unenforceable, which would clearly have dire consequences, for example, if your senior staff leave and set up in direct competition.
For this reason, many businesses will use the services of a specialist employment lawyer, such as the team at Neathouse Partners, to ensure their contracts are fit for purpose and in line with all current legislation.
Neathouse Partners takes things one step further for their clients by offering an insurance policy that (subject to the policy wording terms and conditions) covers your business for the entire cost of obtaining an injunction (including any damages) against a former employee for the breach of a restrictive covenant.
We are an employment law firm that provides expert advice to firms in the recruitment sector, and we are able to provide clear, actionable advice and support for your business success.
To find out more about how we can help your business to thrive in the challenging competitive world, by ensuring that your employment contracts are watertight and in line with all necessary legislation, please contact us on a no-obligation basis, and we will be delighted to assist.
Don't risk the cost that comes with a departing employee heading to a competitor or poaching your clients for their own new venture - take the steps to protect your business now with the right restrictive covenant terms in your senior employees' contracts.