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By Mini Setty

Jul 15th, 2016

Post Termination Restrictive Covenants

The Department for Business, Innovation & Skills (“BIS”) has recently called for evidence on the use of post-termination restrictive covenants.

Background

Post Termination Restrictive Covenants can prove a very effective tool in protecting your business after an employee leaves.

There are four main types of post termination covenants:

  • Non-competition – not working for a competitor or setting up in competition;
  • Non-solicitation – not approaching customers/prospective customers;
  • Non-dealing  - not dealing with customers/ prospective customers, irrespective of whether the former employee has tried to entice them away, or whether the customer has approached the former employee; and
  • Non-poaching – not encouraging key staff members to join a competing business.

In order for a post termination restriction to be enforceable you must ensure that it is reasonable, to protect a legitimate interest and drafted no wider than is absolutely necessary. The restriction should ideally be limited to a geographical area, for example, in which the employer does business, and this must be reasonable. The duration of any post-termination restrictions is also key, and when considering what is reasonable, you should have regard to the length of time until that it will take to ensure the employee is no longer a particular threat to the business. For example, the time it will take to replace that employee, and let their successor get to know your customers or clients.

When establishing whether a restriction is enforceable, the courts have to balance the employee’s need to earn a living with the protection of the business, and are therefore strict on the issue of reasonableness.

The Consultation

Could post-termination restrictive covenants soon be a thing of the past? BIS have now called for evidence on the use of post termination restrictive covenants and whether such clauses hamper innovation and entrepreneurship.

The government want to make Britain a great place to work and do business, and are keen to ensure that the UK has a competitive, flexible and effective labour market and that people are able to start and grow new businesses.

The call for evidence closed earlier this month, and we await the government’s response. However, it is likely that the government will consider whether non-compete clauses unduly restrict a "start-up economy", and may consider limiting the use of restrictive covenants or introducing guidance on their use, if non-compete clauses are stifling British entrepreneurship.

Comment

If post termination restrictive covenants were to be a thing of the past, there are other provisions in your contracts, which may protect your business. A period of garden leave can effectively protect your business, by ensuring exiting employees are kept out of the workplace during their notice period, and cease all contact with customers. Intellectual Property law adequately protects any patents, designs etc. that an employee has created whilst in your employment, and an express and robust confidentiality clause can protect any business information.

In the meantime, if you want to ensure you are protecting your business, and that your restrictions are reasonable, and therefore more likely to be enforceable, please do not hesitate to contact the Employment Team

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