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You’ve found the perfect candidate for a role you’ve been looking to fill for ages, but they disclose that they are subject to post-termination restrictions preventing them from joining a competitor. What do you do?
Let’s look at some key points to consider…
First, what are post-termination employment restrictions?
Post-termination restrictions (also known as restrictive covenants) are designed to stop an employee from carrying out certain activities once their current employment ends.
There are different types of restrictive covenants. The most common are:
- non-compete (preventing an employee working for a competitor);
- non-solicitation (stopping an employee poaching clients or suppliers from their ex-employer);
- non-dealing (prohibiting an employee from dealing with certain clients or suppliers of their ex-employer); and
- non-poaching (preventing an employee poaching former colleagues).
Are the employee’s post-termination restrictions enforceable?
The starting point is that contractual clauses restricting an employee’s activities post-termination are void for being in restraint of trade, unless an employer can show:
- It has a legitimate proprietary interest that it is appropriate to protect – e.g. the protection of customer or supplier connections or confidential information; and
- The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.
The employer seeking to rely on the restriction has the burden of proving this.
It is this second element of the test – deciding whether the protection sought is no more than what is reasonable – that often causes the most issues in practice. When trying to establish if the post-termination restrictions to which your recruit is subject are reasonable, the following points are relevant:
- How senior is the employee? Generally, the more senior the employee, the easier it will be to enforce a restriction.
- When was the restrictive covenant entered into? The reasonableness of a covenant is assessed at the time it was entered into. This is important. If a junior employee signs an employment contract with onerous restrictive covenants, the court will assess whether they were reasonable at the time they signed up to them. It doesn’t matter if the employee later gets promoted to a very senior position (since it would have been open to the employer to require them to enter into new restrictive covenants on promotion).
- Was there any negotiation at the time the covenants were entered into? If an employee did not have the benefit of legal advice and the post-termination restrictions were non-negotiable at the time, it’s less likely they will be considered reasonable.
- Are the restrictions tailored to the employee? The wider and more general they are, the harder it will be to prove they are reasonable. If the restrictions are tailored – e.g., refer to specific clients, suppliers, geographical areas, for short periods of time etc. they are more likely to be considered reasonable. For example, a non-compete restriction preventing a junior employee from joining ‘any business in the UK which could potentially compete with [current employer] for a period of 12-months after termination’ is highly unlikely to be enforceable.
Aside from arguments to be made around the reasonableness of any post-termination restrictions, it is also worth considering whether there are any execution formalities which could render the restrictions unenforceable. For example, is the document containing the restrictive covenants signed? An employer seeking to enforce them will need to show the employee agreed to them. In the absence of a signed contract, this could be hard to prove.
What options do we have?
How you deal with the post-termination restrictions will be very fact dependent, taking into account risk appetite, the strategic need to recruit the particular employee, plus the likely enforceability of any restrictive covenant. Enforcing post-termination restrictions is costly but so is defending such an action.
There are a whole range of options. At one end of the spectrum, some employers will decide to press ahead with recruitment and simply wait to see if the ex-employer takes action; at the other end of the spectrum, some employers will simply decide not to employ the individual at all. Other options include negotiating a reduction – in length or scope – of the restrictions, or engaging other tactics, such as restructuring the employee’s duties for the length of the restriction to avoid any risk of a breach.
What is important is obtaining legal advice on the enforceability of the restrictive covenants before making an offer to employ the individual, so that you are fully appraised of the risks and options involved and can make an informed decision on how to proceed. This is particularly the case given your company could face a claim for inducing a breach of contract if the employee’s ex-employer alleges you knowingly and intentionally induced or procured the employee’s breach. Tactically, it will strengthen an ex-employer’s position if it can claim an ex-employee has breached their restrictive covenants and their new employer induced them to commit that breach – employers also tend to have deeper pockets to fund damages/costs claims.
Is future reform likely?
In May 2023, the then Conservative government stated its intention to introduce a statutory cap on non-compete clauses of three months. There were to be no caps on other restrictive covenants such as non-poaching and non-dealing. No further action was taken on this and given the Labour government is now in power and is introducing a wide range of employment law reforms (none of which deal with restrictive covenants), reform in this area looks unlikely (at least for the moment). This will be a relief for employers who already have enough upcoming changes to grapple with.
We regularly advise businesses on the enforceability of restrictive covenants, whether that is in relation to them hiring from a competitor, losing an employee to a competitor, or dealing with an ex-employee setting up in competition. We also advise senior executives on the enforceability of their post-termination restrictions. To discuss further, please contact Robert Forsyth or another member of the Employment Team.
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