When a key employee leaves an employer, there is always a risk that they will use the knowledge, information and contacts gained and developed during their period of employment for the benefit of a rival.
As a result, it is common for UK employment contracts to contain post-termination restrictive covenants. These purport to restrain employees from certain actions for a period of time after they leave. Typically, they include provisions that deal with non-competition, non-solicitation of customers, non-poaching of other members of staff and non-interference with suppliers.
Employees frequently express the view that restrictive covenants are not enforceable – end of story. But even though it can be difficult to do so, such statements are not entirely correct.
How do the courts decide whether to uphold a restrictive covenant?
The UK courts will not automatically enforce whatever wording an employer and their employee have agreed contractually. Instead, the approach taken when considering whether a restrictive covenant is as follows:
- A contractual term that restricts an employee’s activities after termination of employment is void as it is seen as a restraint of trade and contrary to public policy, unless the employer can show that:
- They have a legitimate proprietary interest that it is appropriate to protect; and
- The contractual restriction is no wider than is reasonable on the basis of the interests of the parties concerned and the public interest.
It is, therefore, possible to enforce restrictive covenants so long as they fit the above criteria.
While the general legal principles have remained the same for many years, the enforceability of restrictive covenants always depends on the particular facts of a given case. Although court decisions illustrate how usual principles are applied, they are only of limited use given their fact-specific nature.
There are many cases that look at the way in which restrictive covenants have been drafted. Many guiding principles have also emerged that have shaped the way employment lawyers draft them. For example, in 2017 in the case of Tillman v Egon Zehnder Ltd, the UK Court of Appeal held that a particular set of restrictions should not be upheld because the scope of a non-compete restriction would have prohibited the taking of a minor shareholding in a competing business.
In other words, restrictions need to be drafted very carefully and, with regard to these decisions, to have the best prospects of being valid. But a recent case – Tenon FM Ltd v Cawley – should serve as a reminder to employers to consider some more fundamental points when using restrictions to protect their business.
The Tenon case
The Tenon case involved an employee who had worked her way up to a senior management role over many years. Over these years, she was issued with a number of employment contracts.
But when she left, her former employer discovered that she had tried to persuade a colleague to join the new company too. As a result, it sought to enforce restrictive covenants.
However, the company was unable to find signed copies of any of the employee’s contracts. Therefore, it relied on previous cases in which the courts had been prepared to accept unsigned contracts as the best evidence of what was agreed if there was no other evidence to the contrary and where the employee had continued to work after having been given the contract.
But the employee said that she had refused to sign any of them because she did not agree to the restrictions. The Court was not prepared to infer acceptance because the post-termination restrictions did not have an immediate impact on her in the same way that a reduction in salary would have done.
In this instance, it was not accepted that the restrictive covenant terms set out in an unsigned contract were the best evidence of what had been agreed.
Tips to improve the likelihood of restrictive covenants being valid
- For the best enforceability prospects, use bespoke restrictions. The idea is that what is enforceable for one business might not be for another. The same goes for different roles within the same business;
- Ensure that restrictive covenants are signed both by the employer and the employee, and that the document is dated. For new joiners, try to do this before their first day in the role;
- If introducing new restrictions after an employee has started work:
- Consider drafting the document in deed form rather than as an ordinary contract; and
- Think about what the employee is receiving in return for agreeing to the restrictions and consider allocating them a payment or other benefit. It is best not to rely simply on the general benefit of remaining in employment.
- Keep copies of signed employment documents securely and where they can easily be located and accessed, if required;
- Update restrictive covenants when you promote someone;
- If an employee is also a shareholder, consider including restrictive covenants in shareholder agreements or share plan documentation too;
- If you are concerned about the level of protection the existing restrictions (if any) provide should a particular employee leave, think about negotiating new restrictions as part of their exit terms. A new suite of restrictions can be included in a settlement agreement on termination.
- Given that it is risky to rely on restrictions alone as they are often difficult to enforce, use them in conjunction with:
- Gardening leave;
- Confidentiality obligations;
- Practical measures to limit the risk to the business when a leaver poses a threat. For example, pay attention to key customer and employee relations to encourage their loyalty.
Interestingly, employment laws in other jurisdictions around the world take very different approaches to the issue of restrictive covenants. Some permit lengthy restricted periods, so long as the employer pays the employee during that time. But under English law, this would not necessarily work.
Anne-Marie Balfour is a solicitor and legal director in the employment, pensions and immigration team at Charles Russell Speechlys LLP. She advises employers and senior executives on all aspects of employment law. Anne-Marie has particular expertise in employment law with an immigration angle and her articles are frequently published in the national and trade press.
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When a key employee leaves an employer, there is always a risk that they will use the knowledge, information and contacts gained and developed during their period of employment for the benefit of a rival.
As a result, it is common for UK employment contracts to contain post-termination restrictive covenants. These purport to restrain employees from certain actions for a period of time after they leave. Typically, they include provisions that deal with non-competition, non-solicitation of customers, non-poaching of other members of staff and non-interference with suppliers.
Employees frequently express the view that restrictive covenants are not enforceable – end of story. But even though it can be difficult to do so, such statements are not entirely correct.
How do the courts decide whether to uphold a restrictive covenant?
The UK courts will not automatically enforce whatever wording an employer and their employee have agreed contractually. Instead, the approach taken when considering whether a restrictive covenant is as follows:
- A contractual term that restricts an employee’s activities after termination of employment is void as it is seen as a restraint of trade and contrary to public policy, unless the employer can show that:
- They have a legitimate proprietary interest that it is appropriate to protect; and
- The contractual restriction is no wider than is reasonable on the basis of the interests of the parties concerned and the public interest.
It is, therefore, possible to enforce restrictive covenants so long as they fit the above criteria.
While the general legal principles have remained the same for many years, the enforceability of restrictive covenants always depends on the particular facts of a given case. Although court decisions illustrate how usual principles are applied, they are only of limited use given their fact-specific nature.
There are many cases that look at the way in which restrictive covenants have been drafted. Many guiding principles have also emerged that have shaped the way employment lawyers draft them. For example, in 2017 in the case of Tillman v Egon Zehnder Ltd, the UK Court of Appeal held that a particular set of restrictions should not be upheld because the scope of a non-compete restriction would have prohibited the taking of a minor shareholding in a competing business.
In other words, restrictions need to be drafted very carefully and, with regard to these decisions, to have the best prospects of being valid. But a recent case – Tenon FM Ltd v Cawley – should serve as a reminder to employers to consider some more fundamental points when using restrictions to protect their business.
The Tenon case
The Tenon case involved an employee who had worked her way up to a senior management role over many years. Over these years, she was issued with a number of employment contracts.
But when she left, her former employer discovered that she had tried to persuade a colleague to join the new company too. As a result, it sought to enforce restrictive covenants.
However, the company was unable to find signed copies of any of the employee’s contracts. Therefore, it relied on previous cases in which the courts had been prepared to accept unsigned contracts as the best evidence of what was agreed if there was no other evidence to the contrary and where the employee had continued to work after having been given the contract.
But the employee said that she had refused to sign any of them because she did not agree to the restrictions. The Court was not prepared to infer acceptance because the post-termination restrictions did not have an immediate impact on her in the same way that a reduction in salary would have done.
In this instance, it was not accepted that the restrictive covenant terms set out in an unsigned contract were the best evidence of what had been agreed.
Tips to improve the likelihood of restrictive covenants being valid
- For the best enforceability prospects, use bespoke restrictions. The idea is that what is enforceable for one business might not be for another. The same goes for different roles within the same business;
- Ensure that restrictive covenants are signed both by the employer and the employee, and that the document is dated. For new joiners, try to do this before their first day in the role;
- If introducing new restrictions after an employee has started work:
- Consider drafting the document in deed form rather than as an ordinary contract; and
- Think about what the employee is receiving in return for agreeing to the restrictions and consider allocating them a payment or other benefit. It is best not to rely simply on the general benefit of remaining in employment.
- Keep copies of signed employment documents securely and where they can easily be located and accessed, if required;
- Update restrictive covenants when you promote someone;
- If an employee is also a shareholder, consider including restrictive covenants in shareholder agreements or share plan documentation too;
- If you are concerned about the level of protection the existing restrictions (if any) provide should a particular employee leave, think about negotiating new restrictions as part of their exit terms. A new suite of restrictions can be included in a settlement agreement on termination.
- Given that it is risky to rely on restrictions alone as they are often difficult to enforce, use them in conjunction with:
- Gardening leave;
- Confidentiality obligations;
- Practical measures to limit the risk to the business when a leaver poses a threat. For example, pay attention to key customer and employee relations to encourage their loyalty.
Interestingly, employment laws in other jurisdictions around the world take very different approaches to the issue of restrictive covenants. Some permit lengthy restricted periods, so long as the employer pays the employee during that time. But under English law, this would not necessarily work.
Anne-Marie Balfour is a solicitor and legal director in the employment, pensions and immigration team at Charles Russell Speechlys LLP. She advises employers and senior executives on all aspects of employment law. Anne-Marie has particular expertise in employment law with an immigration angle and her articles are frequently published in the national and trade press.
OTHER ARTICLES THAT MAY INTEREST YOU
Restrictive covenants: Stifling UK innovation and entrepreneurship?
UK right to work dismissals: A delicate balancing act
A practical introduction to TUPE
