Clients frequently ask if we can provide a set of watertight contractual provisions to prevent departing employees from competing or stealing customers or trade secrets after they leave. Sadly, no such clause exists. However, in this article, we will explore how you can put your business in the best position to mitigate against the risk of unlawful competition.
Perhaps the most common tool in the employer’s armoury is the post-termination restriction – sometimes referred to as a “restrictive covenant”. These contractual clauses effectively prohibit employees from doing things after their employment contract ends.
Despite their widespread use, the traditional legal position is that they operate as a “restraint on trade” and are therefore void and unenforceable. The only circumstances that a court will enforce them is where you can show that (a) the business has a legitimate business interest to protect; and (b) that the restriction goes no further than reasonably necessary to protect that interest.
This highlights the importance of getting the drafting right. A post-termination restriction that exceeds this standard will not be enforced by the court in a more limited manner, but instead will be determined entirely void.
Step 1: Identifying a Legitimate Business Interest
The first step is to identify a legitimate business interest that needs to be protected. Simply saying that you want to stop competition will not be enough.
Instead, think about why and how the specific employee presents a threat. Do they have particular access to and knowledge of confidential information and trade secrets, that they could take to a new, competing employer? Do they have strong commercial connections with customers and clients, that they could use to entice them away to another business? Are you worried that the employee could use their relationships with staff to poach them away? These are all business interests that the courts have decided are legitimate and therefore potentially protectable.
Step 2: Getting the Scope Right
Once you have identified the interest that needs protecting, you need to make sure that the restriction is tailored to that interest. For example, a non-compete restriction may well be the optimal sort of restriction to implement to protect trade secrets, but probably too broad a brush if all you are worried about is the stability of the workforce – in those cases, you might want to think about a restriction that prevents the departing employee from recruiting remaining employees.
As a general rule, we usually consider non-compete clauses to be the hardest to enforce, as they can exclude the employee from the industry for a period of time. They should therefore be considered as a ‘last resort’, and should be accompanied by other restrictions that protect your client base and workforce.
The business also needs to think carefully about the length of the restriction. Whilst the temptation is to go for as long a restriction as possible, a lengthy restriction will be harder to enforce, especially if there is no real justification for it. The courts have been known to consider factors such as general business cycles when determining the validity of restrictions – so linking the length of the restricted period to your normal commercial phases can be helpful (albeit that it is highly unlikely that any restriction will be enforceable if longer than 12 months).
The geographical scope of the restriction can also be important. If your business is localised (for example, it sells to the whole of the UK, but not overseas), then having a worldwide non-compete clause will go too far.
Finally, be careful to identify what your restrictions actually prevent the departing employee from doing, to make sure that it protects your business rather than merely stops the employee working. To give an example, a non-compete restriction that operates to prevent a salesperson moving to a competitor as a buyer (i.e. out of the sales sphere) is likely to be unenforceable, as it does not protect the legitimate business interest (i.e. the relationship with the customers you are selling to).
Getting restrictions right at the earliest stage of an employment relationship is essential. The case law around these provisions tends to be draconian and enforced harshly against employers, so a more restrained, and carefully tailored, restriction is more likely to be enforceable than blanket provisions. Remember that each restriction must reflect the specific role a person is doing. The restriction must also be reasonable at the time it is agreed, not the time it is enforced – which is a good reason to update restrictions when someone is promoted.
Whilst we hope this article has given you a feel for some of the key considerations, we would always advise that you take specific legal advice on drafting restrictions. If you would like to discuss any of these issues, please contact any member of the Employment Team.