Restrictive Covenants & Post Termination Clauses

Each and every business has a wealth of information that it considers important, however some information goes beyond that and becomes almost invaluable. Whilst in employment, this type of game changing information has a level of protection due to implied terms in the employee’s contract, and let’s face it, why would someone jeopardise their own job by sharing it?

But what about after employment, what happens when your employee leaves for pastures new, how can you protect this critical data?

Many employers use clauses in the employment contracts to prevent this information from being used to the advantage of competitors.

What is a Restrictive Covenant Clause?

It’s typically a clause (or set of clauses) in a contract which is reasonably necessary to protect the legitimate interests of the business by restricting the actions an employee can take (especially after they have left).

Whether an employee is looking to set up on their own or join a competing business, the insights and information they have gained from your business could give them an unfair competitive edge (and we don’t like unfair). They could have access to suppliers, customers or clients, trade secrets and even staff. All of which if taken to a competitor would put them at an advantage.

Let’s look at some of the most common clauses;

1. Non-compete – these seek to prevent an individual from working in a similar position for a competitor.
2. Non solicitation – these seek to prevent the ‘poaching’ of key customers and suppliers for business.
3. Non dealing – these seek to prevent the dealing with key customers and suppliers regardless of who approached who.
4. Non poaching – these seek to prevent the ‘poaching’ of employees and staff.

So, we know what they are for & the common types. But, are post termination restrictions enforceable?

Enforceable, yes, easily, no.

Generally, restrictive covenants are void on public policy grounds, so while it may be legal to have them within the contract they cannot overrule other statutory rights. Significantly those around being in restraint of trade, the general principle being that an individual should be free to follow and use their trade and skills without undue restriction from others and this includes a business’s right to compete. However, if they are being used by an employer to protect a legitimate business interest and don’t extend further than reasonably necessary to protect said interest then they could be enforceable.

So this is the big challenge when using restrictive covenants, protecting the business whilst allowing the employee their right to deal with who ever they like. But we did say yes they are enforceable and the key to this is ‘reasonableness’. It has to be for a legitimate interest and restrict in a reasonable way.

These are some general principles to follow;

1. Position specific – A more senior employee will have greater access to confidential information, business strategy and have much more influence over employees and suppliers. In contrast the sales assistant on the till wont have access to that business critical data.
2. Time specific – It’s much more reasonable to put a time scale on a restriction. 90 day non-compete clause or 6 month non dealing clause is more realistic than ‘you can never work for a competitor’. In non-soliciting clauses the time specified could be reversed, no soliciting clients that you have personally dealt with in the previous 6 months before leave date.
3. Geographically specific – it is unlikely that a restriction with a wide geographical area stated is going to be enforceable.
4. Industry specific – In some industries, restrictive covenants are used more frequently and are therefore more likely to be enforceable.

These are just a guide for how to make restrictive covenants more enforceable, however the vagueness inherent in the word reasonableness means that there is no hard and fast way to ensure it will be upheld should it ever go to a court.

While substantial thought should be given to the wording of any post termination clause, even more thought should be given as to whether one should be used at all. For most employees there will be no need for any restrictions post-employment as they can’t/ wont significantly affect your business. But for those that can significantly effect your business like the person responsible for guarding Colonel Sanders’ secret recipe or your key accounts manager then restrictive covenants should definitely be seen as an option.

To receive the HR advice you require, get in touch with us today.