The impact on working arrangements caused by the pandemic has led many workers to re-evaluate what they want from a job, with considerations such as flexible and remote working becoming both more desirable and attainable. This is affecting businesses in all sectors, and the impact it can have is not only on a business’s workforce but also on its customer base that is far reaching.
One of the most important things to consider when a worker leaves a business is restrictive covenants. These are often contained in the employee’s employment contract, service agreement or, in some circumstances, a shareholders agreement. Restrictive covenants are contractual restrictions that prevent individuals from doing certain things after their employment ends. Examples include non-compete clauses (preventing individuals working in competition with their previous employer) and non-solicit clauses (preventing individuals soliciting the customers and employees of their previous employer). Clauses protecting the use of confidential information are also often key. Preservation of a company’s connections, workforce and goodwill is vital for many businesses, so it is important to make sure these clauses bite when necessary. So, how do you do that?
The General Approach
The headline is that restrictive covenants will not be enforceable if they are considered unreasonable. This is a fact-specific assessment and a dynamic area of law. However, the courts aim to strike the balance between protecting a business’s interests and not unduly restraining an individual’s ability to work. To enforce a restrictive covenant, a business has to show that:
- There is a legitimate interest to protect. Examples of this include the business’s trade connections with customers and suppliers, confidential information and maintaining the stability of the workforce.
- The protection is no more than reasonable with regard to the interests of the parties and the public. This is assessed at the point at which the covenant is entered into, rather than at a later date. Both the time period and the geographical area that the restriction covers will be considered.
Recent Case Law
in Richard Baker Harrison v Brooks [2021] EWHC 2652 (QB), the court upheld the claimant’s claim to enforce restrictive covenants against two former employees. The claimant was a distributor of chemicals and minerals. The restrictive covenants contained in the former employees’ employment contracts were:
- For 12 months following termination, prohibition on soliciting any customers, suppliers or employees
- For 9 months following termination:
- Prohibition on involvement with any customers of those parts of the business with which the employee was materially involved for the 12 months prior to termination
- Prohibition on receipt of anything from the claimant’s suppliers that would affect the claimant’s business
- Prohibition on employing any employee of the claimant
- Prohibition on being involved in any business that competes or intends to compete with the claimant
At first glance, these restrictions appear quite wide. However, the claimant argued that they were necessary to protect its legitimate business interests, namely confidential information and trade secrets, connections with suppliers and customers, business opportunities, and the stability of its workforce. The judge responded positively to this and agreed that the restraints were reasonably necessary for the protection of these interests. The judge highlighted the fact that the defendants were able to obtain contracts with suppliers parallel to those that the claimant had, and were only prohibited from dealing with and soliciting customers of the claimant in the same commercial sector. This is therefore a good example of drafting qualified restrictive covenants that do not go beyond what is reasonably necessary.
Interestingly, the defendants in this case argued that all of the covenants should be three months shorter. However, the judge highlighted that a covenant would only be too long to be reasonable if a “much less far-reaching” covenant would be sufficient. In the judge’s view, a difference of three months was not “much less far-reaching”, demonstrating that the courts are unwilling to get into lengthy debate about the precise time period it is appropriate for a covenant to endure.
in contrast, in Dwyer (UK Franchising) Limited v Fredbar Limited [2021] EWHC 1218 (Ch), the court held that the restrictive covenants in the franchise agreement between the parties were not enforceable. The claimant, who was the franchisor of “Drain Doctor brought”, a claim against Fredbar Limited (a Drain Doctor franchisee) and Mr. Bartlett (guarantor for Fredbar Ltd). Mr. Bartlett had no prior experience of plumbing and drainage work prior to setting up the franchisee business, and he ran the business from his home.
After termination of the franchise agreement, Mr. Bartlett started trading as “Daily Drains”. Dwyer took issue with this and attempted to prevent Mr. Bartlett from doing so. The post-termination restrictive covenants in the franchise agreement prevented Mr. Bartlett from being involved with a business similar to, or competitive with, the “Drain Doctor Business”:
- Within the former franchise territory (save for having financial interest in such a business that did not allow him to influence the economic conduct of such a business)
- That operated within five miles of the former franchise territory
Both of these restrictions were operative for 12 months after the termination of the franchise agreement. It was argued by Mr. Bartlett that these restrictions were too wide, because they left him unable to be employed by similar businesses even if there was no confusion with Drain Doctor, and unable to use his home as his registered office address even if operating elsewhere. The judge agreed with Mr. Bartlett. In particular, there was no definition of the “Drain Doctor Business” within the 100-page franchise agreement and so the judge interpreted the restrictions as preventing Mr. Bartlett from being involved in any plumbing or drainage business within the Cardiff territory. Essentially, this would mean that he was unable to work in the area for 12 months. The judge found this unacceptable, in terms of geographical scope and length of time. The other key consideration was the inequality in bargaining powers between Dwyer and Mr. Bartlett at the time the franchise agreement was entered into.
Eville and Jones v Aldiss [2022] EWHC 269 (QB) is a good example of how the seniority of an employee can affect a judge’s conclusion. The defendant was a shareholder and the joint managing director of the claimant company, and his shareholders agreement contained the following restrictions:
- Prohibition on becoming involved with a business that has competed with the group during the last 12 months in a territory in which the group has operated during the last 12 months, while still holding shares
- Prohibition on becoming involved with competitors in the territory, soliciting customers and/or soliciting employees for 18 months following the cessation of the shareholders agreement
The judge concluded that the restrictions were reasonable and, therefore, enforceable. The judge took into consideration the fact that the defendant was the managing director, and, therefore, had a privileged position with access to a significant amount of confidential information.
How to Draft an Effective Post-termination Restrictive Covenant
As the above cases demonstrate, there are no hard and fast rules about what will be considered a reasonable restrictive covenant. However, a recurrent theme is that covenants should be appropriate for the particular circumstances of any given employment relationship, so it is important to bear in mind the bargaining power and seniority level of the employee. Covenants that are qualified so that they relate to specific parts of the business or specific geographical areas are typically more likely to be enforceable, as this assists the argument that they are proportionate to the legitimate business interests that they protect.