Not All Post-termination Restrictions are the Same
When drafting contracts of employment, the clause about which I will spend the most time taking instructions will often be the post-termination restrictions (also called PTRs or restrictive covenants). The problem with PTRs is that they need to fall within the Goldilocks region – not too wide or they’ll be unenforceable, not too narrow or they won’t give the required protection, but just right by only going so far as to protect an employer’s legitimate business interests.
The starting point with PTRs is that they’ll be void and unenforceable unless justified. However, provided that you keep their scope reasonable, they will be able to provide you with an additional layer of protection for your confidential information, client connections, supplier relationships and workforce stability after the employee has left active employment.
I always start with a non-poaching of staff PTR, usually focussed on those staff and consultants who would do damage to the business if poached. If relevant, I’ll include a non-interference with suppliers PTR which can also be relevant for referral relationships. Then I move on to non-solicitation and non-dealing with customers PTRs, asking questions such as how often contact is made with customers, whether then are tied in to fixed-term contracts and how long it would take to consolidate the client relationship after an employee leaves. Consideration should also be given to prospective customers, but these should be carefully defined or it could be argued against you that the expression is too vague to be enforceable.
In respect of each of these PTRs, it is usually necessary to limit the restriction to those with whom the employee has had personal dealings within the six/twelve months period prior to the termination of their employment and (save for the non-poaching of staff) to where the employee is involved in a competing business.
The most onerous PTR is a non-competition restriction which prevents the employee from working in any competing business. The duration of such a restriction is likely to be less than those of other PTRs and should take into account for how long confidential information in the employee’s head is likely to be able to damage the employer if used, together with the fact that you’ll probably be protecting your customer base with other PTRs. Although non-competition restrictions sometimes are limited to a specific geographical area (whether by radius or postcode), this would only be appropriate where it correlates with the customer base. Other types of restriction are where you prevent the employee from being employed by a customer (so that they don’t need your services any more) or joining up in business with other former employees.
Some other important points –
include exceptions to a non-competition restriction where the employee has a minimal shareholding in a competing business
provide that any time spent on garden leave is set-off against the duration of the restrictions
give each restriction its own duration (even if they end up all the same) and never more than twelve months
if not agreed on the commencement of employment, always ensure that new restrictions are agreed in return for something of value, such as an increased salary or new/enhanced employee benefits
get the employee to sign the document recording the PTRs or they will almost certainly be unenforceable
the restrictions will be unenforceable if the employee is constructively dismissed or otherwise terminated in breach of contract, even where that breach is simply paying in lieu of notice or putting the employee on garden leave where there is no contractual right for the employer to do so
the reasonableness of a restriction is judged at the time it is agreed, so it may be necessary to vary the scope of restrictions when an employee is promoted as a lengthy restriction imposed when an employee was junior may well not be enforceable even though the employee was far more senior when they left employment
Finally and having previously decided in 2018 not to do so, the Government launched a consultation on 4 December 2020 (which closed on 26 February 2021) on measures to reform non-competition PTRs in contracts of employment. The consultation sought views on two options:
requiring employers to pay mandatory compensation to employees for the duration of restricted period in order to enforce such restrictions (such as in Germany, France and Italy); or
banning such restrictions completely in order to boost innovation and competition (such as in California).
In the meantime, whether you’re introducing new PTRs, recruiting employees subject to PTRs with their current employer or an employee considering the enforceability of your own PTRs, please contact the team at Synchrony Law for guidance.