Post Termination - Restrictive Covenants

Guidance Notes

Every business has information that it considers both integral and invaluable to its success. Restricting the use of this information by employees after their employment has ended may be vital to the protection of your business or customer contacts.

A restrictive covenant is typically a clause included in a contract of employment which prohibits an employee from competing with their ex-employer for a certain period after they have left the business, or prevents the ex-employee from soliciting or dealing with customers of the business, by using knowledge of those customers gained during his prior employment.

Standard types of restrictive covenants

• Non-Competition - restrictions on the former employee working in similar employment for a competitor;
• Non-Solicitation - prevent poaching of clients/customers/suppliers of the former employer;
• Non-Dealing - prevent a former employee from dealing with former clients/customers/suppliers, regardless of which party approached the other;
• Non-Poaching - prevent an employee poaching former colleagues.

Enforcing a restrictive covenant clause is a severe encroachment of an individual’s freedom to do business. For that reason, courts will only enforce clauses that are aimed at protecting the legitimate business interests of the company and go no further than is reasonably necessary to protect those interests.

In the event of a clause being challenged, it will be the responsibility of the employer to show that it was justified and sufficiently narrow – it must not be drafted too widely.

To meet these criteria employers should be mindful of certain factors:

• The extent of the geographical area of any restriction and the length of time of the post termination restriction must be justified. It is unlikely that a wide geographical area will be justified and, as a general rule, a restriction for more than 6-12 months will be difficult to justify.
• The extent of the activities that the employer is trying to restrict.
• Consideration should also be given to the type of interest being protected, for instance, information such as trade secrets may be granted wider protection than customer information, given that its potential use across markets is wider.
• An employer may also be required to evidence any connection between the employee and any information that is being protected.

The extent of restrictive covenant clauses therefore must be relative to the employee's position within the business. As more senior employees will be in contact with more sensitive information, restrictions placed upon them may be justified as being more restrictive.

Overall, a one-size fits-all policy on restrictive covenant clauses risks any such clauses becoming unenforceable.

Restrictive covenants may also require periodic review in order to maintain their enforceability, as the reasonableness of the covenant is judged at the time it was entered into.

 

Sample Template

The following template is provided as a guide only, the sample text contains all four standard types of restrictive covenants. Employers are advised to carefully review the text with the above points in mind, ensuring it suits their needs and the needs of the role it is being applied to.

 

The Company has, as you acknowledge invested considerable time, effort and expense in developing its business. You acknowledge and agree that if you were to compete with The Company immediately after the termination of your employment The Company would be at a serious disadvantage and such unfair competition would do damage, financial or otherwise. Therefore you acknowledge that these restrictions are fair and reasonable in the circumstances for the protection of The Company’s legitimate business interests.

Definitions:

• Customer: any person, firm, company or organisation who was at any time during the Relevant Period a customer of The Company and for whose business or account you (or any person who reports to you) dealt with or had responsibility for during the relevant period.
• Prospective Customer: any person, firm company or organisation which at any time during the Relevant Period you have been involved on behalf of The Company in a formal tender or proposal with a view to doing business with The Company (or any Associated Company).
• Relevant Period: the [12] months before the termination date.
• Restricted Area: the geographical area in which The Company (or any Associated Company) has conducted Restricted Business.
• Restricted Business: any business of The Company (or any Associated Company) with which you were involved in during the relevant period.
• Termination Date: the date on which your employment with The Company terminates.

Non-Competition

During the term of your employment and for a period of [3 months][6 months][other] after your Termination Date, you will not, either personally or by an agent, whether on your own or in association with another person/organisation, engage in business with or be in any way interested in any person, firm, company or organisation that conducts Restricted Business within the Restricted Area.

Non-Solicitation

During the term of your employment and for a period of [3 months][6 months][other] after your Termination Date, you will not, either personally or by an agent, whether on your own or in association with another person/organisation, canvas, solicitor, or attempt to solicit any business from The Company’s Customers, Prospective Customers for or in relation to any business or activity which is in competition with The Company (or any Associated Company).

Non-Dealing

During the term of your employment and for a period of [3 months][6 months][other] after your Termination Date, you will not, either personally or by an agent, whether on your own or in association with another person/organisation, for or in relation to any business or activity which is in competition with The Company, deal, negotiate, or contract with any Customer or Prospective Customer with whom you personally dealt with during the [three months][six months][other period] immediately preceding the termination of your employment.

Non-Poaching

During the term of your employment and for a period of [3 months][6 months][other] after your Termination Date, you will not, either personally or by an agent, whether on your own or in association with another person/organisation, employ or engage any person who was during the Relevant Period a director, senior or key employee of The Company (or any Associated Company).

General Terms

The period of each Restriction in the above clauses or any part thereof will be reduced by the length of any period immediately before the Termination Date during which The Company required you to remain away from its premises or not to carry out your duties to any Garden Leave clause.

In the event that any one or more or any part of the Restrictions set out about shall be rendered or judged invalid or unenforceable, such restriction or part shall be deemed to be severed from this agreement and such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining restrictions.