Restrictive Covenants: Companies Need to get it Right to Protect Against Competition

Companies should check that post termination restrictions go no further than reasonably necessary. If they do, they are unenforceable.   

Restrictive Covenants, if properly written, act as a safety net.  For example, they can prevent a departing employee taking commercially sensitive information about operations, and customers, to a competitor. 

The difficulty is these post termination restrictions must be no wider than is reasonably necessary to protect a legitimate business interest.  This has been illustrated in the case of Square Global Limited v. Leonard, a recent case heard in the High Court.

In this case, a broker was contracted to give a six-month notice period.  There were also restrictions on working for a competitor for six months, after the end of his employment.

The broker handed in his notice, with immediate effect, and left to work for a competitor. His former employer tried to prevent him from working for the competitor, and relied on the employment contract. In response, the broker claimed he had been constructively dismissed, arguing this released him from his obligation to give notice, and also from the non-compete clause.

The High Court upheld the employer’s argument, and was persuaded that the six-month non-compete clause was reasonable. This was because the restriction went no further than was reasonably necessary to protect the employer’s legitimate business interests. It was also in line with the industry standard. The court also decided that the broker was required to serve out his six-month notice period, on top of the six-month restriction, keeping him out of the market for a total of 12 months. 

This compares with a case in 2014, Ashcourt Rowan Financial Planning Limited v Hall.  Here, the High Court held a restriction was unenforceable, that prevented a former employee working for a competitor for six months after employment terminated.  This was because the covenant was too widely drawn, and went beyond protecting the legitimate business interests of the employer. 

The law has always regarded contractual terms that restrict activity after the termination of employment as 'in restraint of trade,' and void, unless two conditions are met.  These are that the employer has a legitimate interest to protect, and the restriction is strictly limited to what is reasonably necessary to protect a business.

This is a reminder that employers need to ensure that restrictive covenants are no more than reasonably necessary, and focus on activities which would involve the employee directly competing with their old employer.  Trying to do a catch-all is impossible to enforce. 

Garden leave, and how or when that might be offset, should also be tackled.  What is important is that any restrictions are carefully drafted, and checked at the outset.

If you would like to discuss Restrictive Covenants or any employment matter, please contact the TSP Employment team on 01206 574431 or email info@tsplegal.com