If your business relies heavily on the strength of your employees’ relationships with clients or on a particular employees’ knowledge/skills, it’s important to consider what could happen if your employees leave the business.
For example, you may have invested time and money in employing a top sales person and have encouraged them to get close to your clients - but what happens when that person leaves your employment? How can you prevent them taking your clients and lucrative contracts with them when they leave?
Of course, there are practical measures you can take such as ensuring that there is always more than one person in your business who is close to a client so that if one leaves, there’s always the strength of the relationship with the other to rely upon. There are also legal protections you can put in place in the shape of post-termination restrictions in contracts of employment, or “restrictive covenants” as they’re often referred to.
Commonly such restrictions seek to prevent employees from soliciting and/or dealing with clients, enticing employees away from your business and setting up in competition with your business for a specified length of time following termination of employment.
However, it’s not sufficient simply to put restrictions into your employees’ contracts of employment and hope to rely on them. Post-termination restrictions amount to a restraint of trade, which is contrary to public policy and therefore, on the face of it, they are unenforceable. However, restrictions will be enforced by a court if they are reasonable, proportionate and exist to protect a legitimate business interest.
Bartholomews Agri Food v Thorntonserves as a timely reminder that post-termination restrictions should be carefully drafted and regularly reviewed. In this case, the High Court ruled that a restriction which was unenforceable when it was first imposed, remains unenforceable regardless of whether the employee is later promoted to a role where it could be regarded as reasonable. In this case, the restriction was in place when the employee first entered the business as a trainee in 1997. At that time he had no experience or customer base; therefore a non-compete clause which prevented him from working with any of the employer's existing customer base for six-months was inappropriate and in restraint of trade. On that basis alone, the restriction was unenforceable.
In addition, the Court found that the terms of the restriction were drafted too widely to be reasonable even after the employee's 20-year career. It sought to prevent the employee from dealing with any customer of the employer regardless of whether he had had any prior dealings with the customer. Given that the employee worked with customers who represented only 2% of the company's overall turnover, it would be unfair to prevent him from working with customers representing the other 98% of the employer's existing customer base.
So how can you ensure that your restrictions have the best possible chance of being enforceable? Here are a few tips:
Trying to enforce a post-termination restriction is a costly and stressful process and there’s no guarantee that a court will uphold the restriction (which sets an unwelcome precedent in relation to the rest of your staff). Well drafted and regularly reviewed restrictions mean that it’s much less likely that departing employees will try to breach the restrictions (i.e. they serve as a very useful deterrent) but if you do have to reply upon them, they’re much more likely to be enforceable.
For more information in relation to the drafting or enforceability of post-termination, please contact Hayley Anderson or Hannah Roche.