It’s becoming more and more common for employment contracts to try and limit an employee’s ability to compete, or work for a competitor, after they leave their job.
In his latest article, Employment Solicitor Chris Dobbs looks at post-termination restrictions, how they work and how to include them in a contract.
What are post-termination restrictions?
Post-termination restrictions, sometimes referred to by the broader name of restrictive covenants, are contractual obligations which continue beyond the employment relationship for this purpose.
Naturally, these restrictions can lead to disputes when the relationship looks likely to come to an end.
This may be because a former employee is deliberately breaching them by ‘poaching’ clients, or because an employee considering leaving realises the extent of their effect.
What is an example of a post termination restriction?
There are several different types of post-termination obligation and a clause containing them can be anything from a few lines to several paragraphs. They generally fall in to one of the following categories:
Confidentiality clauses
These prevent the employee from disclosing sensitive business information about the employer or its clients.
Non-Compete clauses
Non-compete clauses are designed to stop an employee from leaving the employer and either working in the same sector for a competitor or setting up business in competition with the employer.
Non-dealing clauses
These clauses are broader than non-solicitation restrictions and prevent an employee from doing any business with existing clients or customers. This aims to prevent employees from taking their “loyal following” with them to a new job.
Non-solicitation clauses
Aim to stop an employee who leaves from marketing themselves to the employer’s clients or approaching them to change their business.
What is a non-compete agreement in an employee contract?
At its most simple, a non-compete clause stops an employee working for a competitor.
These clauses are often drafted to prevent a worker from joining a competing business (which may be from a named list or simply a defined term) for a period of time after leaving their current employer.
They are one of the harder post termination restrictions to enforce but, when well drafted, they can help to protect a business’ commercial interests very effectively.
Are non-compete clauses legal in the UK?
Post termination restrictions should not be ignored and, while it is true to say that they can be expensive and difficult to enforce, that is not the same as it being impossible to do so.
Non-compete clauses can amount to a “restraint of trade” which, in many circumstances, would be unenforceable as a matter of public policy.
However, an employer who is able to show that such a clause protects a legitimate business interest will be able to enforce these clauses where they can show that it reasonably protects that interest.
The clause must only go as far as is necessary to protect that interest and therefore there are many relevant factors associated with enforcement.
The litigation around this issue is often expensive and time consuming.
Related: The importance of having a well drafted non-compete clause
What is the maximum length of a non-compete clause?
In theory, there is no maximum time limit on the length of a post-termination restriction because the law only requires that the restriction goes only as far as is necessary to protect a legitimate business interest.
In practise, it is unusual for the courts to uphold any such clause in an employment contract which purports to last for more than two years.
The length of the restriction is, however, one of the factors that will be taken into account by the courts in assessing the reasonableness of the clause. If a relatively junior employee who leaves after a couple of months is restricted from working in their chosen sector for two years, the court may take the view that this was unreasonable.
This carries the risk of invalidating the entire non-compete clause and rendering it unenforceable.
How do I include a non-compete clause in a contract?
As is clear from the above, non-compete clauses need to be carefully drafted and often individualised to the relevant employee.
If the same standard non-compete clauses are used for both junior staff and are also in executive contracts, this could give rise to the question as to whether they were ever appropriate in the junior contract.
Such clauses can simply be included in a new contract and this is fairly common but the wording does need careful consideration if there is any intention of enforcing such clauses in the future.
It is much more difficult to introduce post-termination restrictions at a later date, this would be a significant change to the contractual terms as originally agreed and would require mutual agreement between the employer and the employee.
The court will also likely require there to have been some form of legal consideration given to the employee, for example a pay-rise or promotion.
Related: How to write strong employment contracts - Advice for Employers
Can you enforce a non-compete agreement in the UK?
Non-compete clauses are enforceable under UK law where they are reasonable and only go so far as is necessary to protect a legitimate business interest.
They are enforced through the civil courts and, when they are breached, the employer has the option to issue proceedings against the former employee to recover its financial losses, to seek an injunction preventing the breach from continuing, or both.
These proceedings are expensive and not without significant risk. The clause may be deemed unenforceable which carries the risk to the employer of its other staff becoming aware that the clause is unenforceable.
Although such cases are decided on an individual basis, if the clause is used generically across multiple staff there is an obvious risk.
What about the remedies?
The remedies are also somewhat limited, particularly as injunctions are considered extreme and draconian by the courts. Where the courts can make a financial remedy instead, it will often endeavour to do so.
However, this means that the total financial loss to the business must justify the potential costs of litigation and, of course, that the individual employee has sufficient resources to pay any award.
What if a former employee breaches a post termination covenant?
If an employer suspects that an employee is breaching a post termination restriction, they should firstly collate any evidence available to them to help support their case.
It may be fairly obvious that an employee has left the business and joined a competitor, but in order to take further legal action it will also help if the former employer can show that this has led to an associated financial loss.
It may, for example, be the case that the former employee has taken a significant number of clients with them.
What’s the next step?
The next step is usually a formal letter to the former employee explaining the breach of the restriction, the action they are required to take in order to stop themselves continuing to breach the restriction, and asserting potential legal claims should they continue to be in breach.
At this time, it is usual for the employer to request the former employee signs a confirmatory statement that they understand that they are in breach, acknowledge the original post restriction terms, and accept that if they continue they may face formal legal action.
If the breach then continues, the former employer will have to make the decision as to whether to issue formal proceedings.
Do restrictive covenants apply if the employee is dismissed?
As always, the classic employment lawyer’s answer: it depends.
Post termination restrictions are designed to survive termination and therefore this would ordinarily include most dismissal situations. Properly dismissing an employee for any of the fair reasons, will usually mean that the post termination restriction survives the dismissal.
If the employer chooses to terminate through a settlement agreement, post termination restrictions can be reinforced or even introduced in these agreements.
However, the employment relationship is ultimately a contract. If an employer breaches that contract first, then there is a principle which says they cannot rely on the contractual terms to their benefits in a contract which they themselves have breached.
There is therefore a risk that if a dismissal is found to be wrongful (incorrect notice pay, for example) or if the employee is found to have been constructively dismissed (which is simply a statutory breach of contract claim), post termination restrictions may not be enforceable.
Related: How to make redundancies - A guide for employers
Future Updates - Important
In May 2023, the government confirmed its plans to reform non-compete clauses in employment contracts. Back in 2020, they had published a consultation paper that explored multiple options for reforming the law around post termination restrictions.
The government, some 2 1/2 years later, has now confirmed that it will look to cap the period of a non-compete clause to a maximum of three months through legislative change.
What does this mean for other forms post-termination agreements?
This would not change other forms of post termination restriction such as non-solicitation clauses, or the introduction and use of paid periods of notice or garden leave.
Non solicitation clauses are often argued to be the less extreme version of a non-compete clause in any case; the obligation not to try and poach customers or clients is the aspect of the restriction which best protects the legitimate interests of the business in any case.
It is sometimes argued that, where a well drafted non solicitation clause has effect, a linked non-compete clause is unnecessarily extreme. Paid forms of notice and garden leave, while not ideal for the employer, do at least prevent the employee from engaging with clients or customers in the period before they leave the business.
What effect will any new law have?
It is not clear at this stage exactly how any new law will be introduced, the effect it will have, or whether it will apply to existing post termination clauses.
It is also interesting to note that where it does not affect non-solicitation clauses as above, the situation could arise where someone in a sales job is able to go and work for a competitor but is effectively feted from doing their job by the non-solicitation clause.
An Employment Solicitor’s View
Chris Dobbs, experienced Employment Solicitor at Frettens, says: “The effective use of post termination clauses is a particularly grey area, even by employment law standards. A clause may be ostensibly enforceable, but that is not the same as it being economically viable to take enforcement action.
Depending on the change to legislation, full non-compete clauses as we currently understand them may become a thing of the past. Employers wanting to protect their position to the same extent will need to look at alternative options and, unfortunately, this may simply be having to place the employee on a period of garden leave for the length of their notice.”
Advice for employers
Chris continues “Other forms of well drafted post termination restriction will remain an option and these can often be used to good effect to help protect a business’ interests
It is always a good idea to review any existing templates and contractual terms periodically and to seek advice on amendments which may be required for practical or legal reasons.”
Employment & HR Solicitors
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