MOON News

Our friends at TLT Solicitors have provided some advice on contractual restrictions post employment:

Some suggest that employment figures held up better than feared during the recession of 2008/09.  Many will know this was achieved by reducing salaries, cutting other benefits and taking steps to reduce the cost of employment even where jobs were maintained.  At the time a relief to those who might otherwise have been redundant, but with further nil rate salary reviews memories fade. 

Tough times test loyalty and financial constraints, limiting investment and frustrating ambitions loosen ties to existing employers.  Employees, particularly those with strong customer and supplier relationships, will consider taking their knowledge and goodwill to an existing competitor or alone or with others may set up a competing business. 

They and their current employers will consider the contractual provisions relating to their exit from the business.

Contractual restrictions post employment

Popular myth has it that restrictive covenants are not enforceable or worth the paper they are written on. When poorly drafted or too ambitious in terms of geographical restriction, the definition of the customer, they may go well beyond what is reasonably required to protect the business. If so they will be unenforceable. 

However, courts have become increasingly intolerant of senior executives in particular (as well as others) who set out to carry off their current employer's business.  Courts have enforced restrictions against the solicitation of trade in competition with a former employer for periods of up to 12 months.  Again, popular myth had it that restrictions beyond six months were probably too long.  Therefore careful drafting of the post termination restriction can be effective. 

Restrictions following termination are only part of the story.  

Garden leave

Employers may consider the use of garden leave during all or part of that notice period.  This can be an effective way of holding a departing employee out of the market, while the business introduces others to customer and supplier relationships thereby securing the business. In addition the leaver remains employed during garden leave and obliged to follow reasonable instructions from their current employer, assisting with handover of information. Garden leave is a valuable tool, but, notwithstanding the recent willingness of a court to imply a garden leave provision in a contract, to be confident of its position the employer should explicitly reserve the right to place on garden leave.

However, it is necessary to consider the cumulative total period of restriction if placing on  garden leave, followed by post termination restrictions.  Courts have cut down as unreasonable post termination restrictions that seek to run from the date of termination rather than from the earlier date on which the individual was placed on garden leave.

Use of employers systems

Perhaps one of the clumsiest thing that many individuals do when preparing for a new employment or venture is to use their existing employers time to further their plans and worse still the employer's IT systems to share plans with and solicit future trade from existing suppliers or customers of their current employer .  This will be a serious breach of their obligations to current employer and can lead to immediate disciplinary consequences.

Download of databases

In addition the downloading and use of all, or part of an employers database is protected for up to 15 years post termination by the Copyright and Rights in Databases Regulations 1997. So, for example, extracting and use of chunks of the current employers customer list is a bad idea.

Taking colleagues with you

Employers should also seek to protect against the removal of teams or the solicitation of colleagues to join.  This can be a breach of current obligation to an employer, particularly if the individual is employed at a senior level and therefore owes not only contractual but fiduciary duties, placing him or her under a positive obligation to promote the employer's business. The timing and order of events can make all the difference as to whether solicitation of colleagues will be an enforceable breach.

There are a number of provisions, both contractual, common law and statutory that impact on an exit from a current business.

It is important for the employer to consider carefully the nature of its business and the restrictions that it might require to protect it.  The provisions that it seeks to introduce should go as far as, but no further, that is reasonably necessary for it to do so.

When terminating an employment, the employer should be careful not to put itself in breach of contract. Breach of contract will leave it unable to enforce any restrictions.

The employee who wishes to set up or join a new venture is, of course, entitled to do so but should plan with care and avoid breaching his or her obligations to existing employers. 

Robert Bourns

Senior Partner

May 2011