Restrictive Covenants in Contracts of Employment

Most employees have never heard of a post-termination covenant otherwise known as a restrictive covenant, perhaps it is because their role is not at a senior level.

It is always worth an employer taking the time to consider whether its business requires the protection of a post-termination restrictive covenant (“PTRC”). A PTRC is a clause in the contract of employment which prohibits the employee from competing with their ex-employer for a certain period after they have left employment. It may prevent the employee from soliciting or dealing with customers or clients of the business with knowledge gained during their previous employment.

Employees have a duty not to compete with their employer whilst employed or to take action that would undermine the employer’s business.  Matters which are deemed confidential such as client lists, pricing structures, and special know-how, are examples of information which might be considered confidential but this is by no means an exhaustive list.

To protect the confidential information after the employee has left there may be:

  • non-complete restrictions on the former employee from working for a competitor
  • non-dealing to prevent the employee from dealing with former clients/customers/suppliers
  • non-poaching of former colleagues which might negatively affect the operation of the business
  • non-solicitation to prevent poaching of clients/customers/suppliers of the former employer

The rules surrounding the enforceability of these restrictions are complicated but have been clarified and updated in the case of Planon Limited v Gilligan. Planon Limited was a software developer which brought proceedings against its former employee, Mr Gilligan, who was the account manager, for breach of the restrictive covenants he had agreed to adhere to during his employment. He went to work for a competitor. During the last two weeks of his employment, he was placed on gardening leave.  The non-compete covenant prohibited him amongst other terms from dealing with any business which competed with Planon Limited. Planon sought an interim injunction in respect of breach of the non-compete clause in the High Court. The Judge refused to enforce the non-compete clause, finding that the likelihood was that Mr Gilligan would be prevented from working in his chosen profession for 12 months.

Planon appealed to the Court of Appeal after its application was refused. The Court of Appeal rejected the appeal stating that ‘restraining an employee from taking up a new employment opportunity for many months may well cause him damage that cannot be compensated in money alone if it turns out at trial that the covenant is not enforceable’.  Delay was also a factor in the Court’s decision due to the length of time that had passed, the damage had in all probability already been done and the injunction was refused as there had been delays in applying for the interim injunction.

The following principles are established and cases in this area turn on their own facts. The validity of a covenant is tested when the contract is made in the light of what might be anticipated at the time it was made and what the reasonable interests of the parties are, that it protects a proprietary interest of the employer which is reasonably necessary.

PTRCs can be difficult to enforce, as they represent a severe encroachment of an individual’s freedom and could be a restraint of trade. Only PTRCs intended to protect a legitimate business interest of the company are permitted and those that are reasonably necessary to protect the business interests, the covenant is to be no wider than is reasonably necessary for the protection of those interests if it is to be upheld by the courts.

The drafting of the clause requires consideration and care, to show justification and should be sufficiently narrow to protect the interests of the business, as well as ensure the clause is focused on the level and status of the employee at the time of signing.

We recommend that the PTRC is reviewed regularly according to the status of the employee, in accordance with career progress and exposure to confidential information  as employees move up the ranks in seniority. An extensive clause may not be suitable for the office junior initially as they may not have exposure to much of what is considered to be confidential by the employer.

Be mindful to review and update the PTRC as the employee’s career progresses and they become exposed to more confidential information.

The employer must show that it is justified in pursuing the enforcement of the post-termination covenant.  Courts will consider the following factors:

  • The link between the employee and the information to be protected and the extent of the activities that are being restricted.
  • The extent of the geographical area of any restrictions and the length of time it is to be imposed. This is generally imposed between six to 12 months as any longer may be difficult to justify.

There are several remedies for a breach of restricted covenants, for more information on the application of PTRCs to your business interests or to discuss anything else in this article, please contact our Employment team on 01603 677077.