Employers seeking to protect their business in the event of a key employee leaving who may be able to take customers with them will normally include restrictive covenants in employment contracts in order to reduce the scope for this occurring. Such restrictions will be considered void in law as being “in restraint of trade” unless they protect a legitimate interest and are deemed reasonable in the circumstances. The protection of a legitimate interest usually applies where employees either have access to confidential information or connections with customers which would enable them to take business from their former employers if not restrained from doing so. To be valid, the restriction must be no wider than is reasonably necessary to protect that interest.
In Bartholomew Agri Food Ltd v Thornton, the High Court considered the enforceability of a contractual restriction that reas as follows:
“Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area….or on their own account without prior approval from the Company…”
The judge held that this was in restraint of trade and unenforceable on the basis that it was imposed nearly 20 years previously when the employee was a trainee with no customer contacts, and that the terms were manifestly inappropriate for such a junior employee. He emphasised that a covenant had to be enforceable at the time it was agreed. Additionally the clause was wider than necessary for the protection of the employer’s business as it applied to all their customers regardless of whether the employee had knowledge of them and only dealt with a small percentage of them.
This shows the importance of making the restrictive covenants no wider than necessary and of keeping them under review. Although they may have the required deterrent effect, it is likely to weaken enforceability if employers have restrictive covenants that cover future risks if the restriction is not required at the time it is made. Therefore, this element of the employment contract should be reviewed as a matter of course when there is a change in the employee’s duties or status which might require amendments to the covenants.
Additionally, when covenants are changed or added during employment, there needs to be some evidence that they represent a contractual agreement. In this regard, there has to be some “consideration” given to the employee in return as without it the new covenants will not form part of a binding contract and would therefore be unenforceable.
This was an argument used by the employee in the recent case of Decorus Ltd v Penfold. However, the Court considered the employee’s appraisal, pay rise and continued employment to be valid consideration for the new contract containing the revised restrictions. The covenants concerned restricted his activities for 6 months following the end of his employment and were as follows:
- A non-compete clause to prevent him from being employed by the employer’s main competitors.
- A non-dealing clause to prevent him dealing with the employer’s customers.
- A non-solicitation clause to prevent him soliciting business from the employer’s customers.
The Court found that the non-compete covenant was unenforceable as it went further than was necessary to protect the employer’s interests. However, the non-dealing and non-solicitation clauses were reasonable in that they were confined to customers and prospective customers with whom the employee had dealings. Although a court cannot rewrite a restrictive covenant to make it reasonable, where there are separate covenants, it can delete one if it is unreasonable without the others being affected, which is what the Court did in this case.
The foregoing illustrates how restrictive covenants which are properly drafted and properly introduced can protect an employer’s interests when a former employee seeks to take business away from his former employer.
At Employee Management Ltd, our HR support consultants provide commercially minded employment law advice and routinely produce bespoke employment contracts that feature tightly worded but proportionate restrictive covenants that actively reduce an organisation’s exposure when key employees leave. We also offer a comprehensive employment tribunal representation service through which we can handle any claims that flow from an acrimonious parting of the ways. If you are an employer concerned about the damage employees in certain positions could do to your business if / when they leave, please feel free to contact us for a confidential, no-obligation discussion.