Businesses rely on their clients, and if an employee leaves there is the risk they will take those relationships with them, particularly if the employee has a client-facing role or if the business provides a service rather than a product, where personal relationships can be key.
An employee who has strong client relationships is an attractive and valuable commodity for competitors, who will be all too keen to tempt them away, in the hope the clients will then follow.
While certain terms are implied into every contract of employment, these generally do not extend to any period after the employment ends. Express restrictions can, however, limit the employee’s future conduct and deter approaches from new employers.
A clause in a contract of employment, which aims to prevent an employee from doing “something” after they have left their employment, is usually referred to as a restrictive covenant.
It is a common misconception that restrictive covenants are unenforceable. It is true, however, that the starting position is that a restrictive covenant is unenforceable for being an unlawful restraint of trade and contrary to public policy, unless the party seeking to enforce it can show:
- it has a legitimate interest to protect; and
- the protection sought goes no further than what is “reasonable” to protect that interest.
Cases are determined on their own specific facts, and so in any given circumstance it can be difficult to predict whether a restriction will in fact be enforced or not. The costs of enforcing and resisting restrictive covenants can be considerable, but this unpredictability and cost can deter competitors from poaching key employees.
A legitimate interest that an employer may want to protect can include:
- protecting customers;
- maintaining a stable workforce;
- protecting confidential information and trade secrets; and
- maintaining relationships with suppliers.
The issue of “reasonableness” is judged at the time the covenant is entered into. The burden of proving reasonableness falls on the employer.
Given that reasonableness is judged at the time a restriction is entered into, it is important they are reviewed and, if necessary, amended if an employee is promoted or changes roles.
Balancing act
Reasonableness means balancing the interests of the employer against those of the employee — that is, their need to earn a living. The fact that an employer has different levels of restriction for different types or grades of employee may be persuasive in terms of showing reasonableness.
It will be difficult to justify, for example, having more onerous restrictions on junior employees if senior employees have less restrictions. If, however, restrictions are tiered according to the seniority of an employee, a court is more likely to be persuaded of their reasonableness. The court will therefore consider the particular factual matrix in any given set of circumstances.
There are four main types of restrictive covenant:
- Non-solicitation: this type of clause aims to prevent ex-employees from approaching a customer or client of their ex-employer, with a view to solicit that client’s business. The protection sought may be extended to both historic (that is, past) and future potential customers. Restricting the solicitation of prospective clients can be difficult as they are hard to define, and protection is likely to be only appropriate if the employer can show it has invested time and money in building up potential relationships that have not yet come to fruition.
- Non-dealing: this type of clause aims to prevent ex-employees from working with certain clients or customers for a period of time after their employment has ended. It does not require the employee to have approached the client in question or to have tried to actively solicit them. The ex-employee is simply prevented from providing services to the customer in question, whether the ex-employee has made an approach or not. Such clauses are useful because they avoid an argument over whether the ex-employee has made a positive approach to the customer, which can often be difficult to prove. Solicitation is difficult to identify. Is it enough, for example, to simply tell a client you are leaving, where you are going, and how much less your fees will be with your new employer, or does it require something more?
- Non-poaching: this type of clause aims to prevent an ex-employee from soliciting their ex-employer’s current key employees. A non-poaching clause may protect the ex-employers “legitimate interest” of stability in the workforce. Consideration will need to be given to the ex-employee’s influence over key employees, how long this influence is likely to continue, and the class of employee to which the restriction would apply. For example, a clause restricting an ex-employee from poaching all employees within the organisation for a period of two years after termination will probably be difficult to enforce because of its very wide scope.
- Non-competition: this type of clause aims to prevent ex-employees from joining a rival employer and undertaking similar work for that employer for a defined period after their employment has ended. These clauses are considered the hardest restriction to enforce because lesser restrictions (for example, non solicitation of clients) may be adequate protection and therefore more reasonable. These clauses have nevertheless been upheld where it has been considered necessary to do so in order to protect things like confidential information.
There can be more nuanced restrictive covenants — for example, those that seek to prevent two or more senior employees working for a competing business together.
While it may be tempting, it is inadvisable to simply “cut and paste” from a standard agreement, or to copy from someone else’s contract of employment. Employers should also resist the natural temptation to make a restriction as wide as possible, for as long as possible.
