FAQs: Post-Termination Restrictive Covenants for Employers

1. What sort of restrictions can you place upon your employees after they leave?
2. Can you impose any restrictions you want?
3. What is a legitimate business interest?
4. Why would post termination restrictions be deemed unreasonable?
5. Do your employees have to accept any restrictions you want to impose?
6. Can you ask consultants to agree to post-termination restrictive covenants?
7. A senior employee wants to leave – can you negotiate a deal which includes them agreeing not to compete after they leave?
8. What can you do if your employee breaches the covenants?

What sort of restrictions can you place upon your employees after they leave?

The most common types are:

• General confidentiality. This will prevent your employee from divulging sensitive information about your business or your clients
• Non-solicitation. Employees will not be allowed to approach your existing clients or your staff even after their employment has ended
• Non-dealership. This restricts employees from accepting business from your existing clients after they have left your business.  This is particularly useful if you are concerned that your clients might try to ‘follow’ your most valuable employees if they decide to join a competitor or start their own business
• Non-compete. This is a much wider clause because it is designed to prevent former employees from working in direct competition with you – either on a self-employed basis or with another company in the same industry

Can you impose any restrictions you want?

No. Restrictions must always be justified, even if your employee agrees to them. You need to be able to show the Court that there is a legitimate business interest to protect and that all covenants are reasonable. If you impose covenants which are unnecessary or too broad in scope, the Court will not enforce them against ex-employees and your business will be left exposed.

To ensure covenants are appropriate and reasonable for each individual employee, you should always seek specialist Employment Law advice.

What is a legitimate business interest?

Usually, legitimate interests include:

• Trade secrets or other confidential information about your business
• Your trade or customer connections
• The need to maintain a stable workforce

For the majority of employers, the need to protect confidential information and maintain relationships with clients is paramount. It is usually possible to put in place enforceable post termination covenants which are reasonable and still safeguard your business interests. Exactly how restrictive depends on your particular industry, the sector you work in, and the need to restrict certain employees such as sales people.

Why would post termination restrictions be deemed unreasonable?

Whether a restriction is considered to be reasonable will depend upon a number of factors including the type of post termination restrictive covenant in question, the nature of your business, the seniority of your employee, the geographical restraint you impose and, most importantly, how long the covenant will last for.

Each restriction needs to be carefully looked at – taking into account the need of the business alongside your employee’s right to work.

A post termination covenant which is reasonable for one employee will not necessarily be reasonable for everyone in your business. If you are seeking to impose post termination covenants across the whole of your workforce, you will have to tailor the covenants to each individual job role.

Do your employees have to accept any restrictions you want to impose?

Post-termination restrictions would normally be included in the contract that you provide to your staff at the beginning of their employment. It is possible that your employee will try to negotiate to reduce the scope of these post termination covenants, but if they sign the contract – or start work without signing or raising any issues with the contract – then they will be taken to have agreed to the restrictions.

If you want to introduce restrictions to existing staff, or vary their existing covenants, then you need to seek their agreement. You can do this simply in a letter or, better still, by providing them with a new contract. However, you also need to ensure that you provide consideration for the covenants such as a one-off payment, or more favourable terms. Doing so will show a Court that they have been validly agreed to.

Can you ask consultants to agree to post-termination restrictive covenants?

In principle, yes.

It would normally be appropriate to ask a consultant to agree to non-solicitation and non-dealership clauses. A standard non-compete clause is usually only relevant in an employee/employer relationship rather than for freelancers who are self-employed. But if the business is niche, you may still be able to rely on a non-compete clause for freelancers.

A senior employee wants to leave – can you negotiate a deal which includes them agreeing not to compete after they leave?

Yes – in some cases it will be appropriate to reiterate existing post-termination covenants in your employee’s Settlement Agreement. It may also be possible to change or add to these.

This is particularly common where:

• Your employee is leaving as a result of a dispute, even if they already have reasonable covenants in their contract
• Your employee’s covenants are no longer fit for purpose. For example, they might have been promoted since agreeing to their original covenants, which were then not updated to reflect their new seniority
• They have never had covenants at all, and you are paying them a generous sum to leave

Even in Settlement Agreements, it is important to ensure that any post termination covenants are reasonable, since otherwise they could become deal breakers and jeopardise the completion of a Settlement Agreement.

What can you do if your employee breaches the covenants?

Depending upon the circumstances, you may be able to apply to Court for an injunction which would prevent them from breaching the covenants further.

First of all, however, you should send a Letter Before Action and invite them to offer Undertakings.

This is because whilst an injunction might be extremely valuable to your business, the financial costs of litigating are high and injunctions are only ever discretionary. As such, it is important that you seek expert specialist Employment Law advice before taking this step.

If your employee takes away important clients and you lose business, you may be able to claim losses or even an account of their profits.

Contact us today on 01273 609911, or email info@ms-solicitors.co.uk to find out how we can help you.