Post-termination restrictive covenants normally found in contracts of employment, such as those which seek to prevent solicitation of customers, clients, suppliers, other employees, or general competition for a defined period after termination, in order to protect the employer’s confidential information, customer connections, its goodwill and the stability of its workforce.
Why have post-termination restrictive covenants?
Departing employees are often well-placed to take advantage of confidential information, strategic plans, customer and client details or other information about their employer’s business, after the termination of their employment. They may attempt to use this information for the benefit of their new employer, or in order to set up a rival business. This can seriously harm the former employer’s business. Although employees must observe certain terms that are implied into every contract of employment, these are of a limited nature and do not generally extend to the period after termination of the contract (except in relation to trade secrets). Express restrictions, on the other hand:
- Can be specifically designed to reflect the parties’ circumstances.
- If properly drafted and reasonable, can limit the employee’s conduct and prevent them from damaging the former employer’s business.
- Might deter employees from joining competitors.
- Might deter potential new employers, who face the risk that the restrictions will be enforced by the courts, and may themselves be vulnerable to certain claims, such as inducing a breach of contract, or unlawful means conspiracy.
How are they enforced by the court?
Usually, court proceedings are not necessary as a strong letter before action does suffice. However if you are required to take legal action then the court usually applies the following key principles in assessing and enforcing post-termination restrictive covenants:
Reasonableness. Post-termination restraints are enforceable if they are reasonable, having regard to the interests of the parties and the public interest.
Legitimate interest. To be enforceable, a restrictive covenant must be designed to protect a legitimate proprietary interest of the employer for which the restraint is reasonably necessary. Legitimate interests include an employer’s trade connections with customers or suppliers, confidential information and maintaining the stability of the workforce.
Special treatment for employment covenants. Restrictive covenants in employment contracts are generally viewed more strictly than those in commercial contracts, such as those between a seller and a buyer. They are usually less likely to be regarded as reasonable, because of the inequality of bargaining positions between employer and employee.
Preventing competition must not be an end in itself. Restrictive covenants having the sole aim of preventing competition are never upheld by the court.
Restrictions must be no wider than necessary. For any covenant in restraint of trade to be treated as reasonable in the interests of the parties.
Post-termination restrictions must be drafted properly
To have any real chance of getting an outgoing employee to comply with the restrictions or a court to enforce them – they must be drafted carefully and tailored to your business.
We routinely draft post termination restrictions, which have been tested before the courts and encourage you to take advice on protecting your business and confidential information.
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