In a time of economic uncertainty, employers naturally wish to protect their business and client/customer base. Often employers will seek to do this by imposing post termination restrictions, otherwise known as restrictive covenants, on employees.
There are a number of different covenants an employer can seek to impose on employees which are designed at restricting their actions once they have left employment. The most common are:
- Non-solicitation of customers. This is aimed at preventing former employees actively approaching customers, and usually applies only to customers the former employees had material contact with during their employment. Sometimes this kind of restriction will also apply to prospective customers, though what amounts to a prospective customer would need to be clearly defined.
- Non-dealing with customers. This goes beyond non-solicitation and is aimed at preventing former employees from having any dealings with certain customers, even where the customer makes the first approach.
- Non-solicitation of employees. This is aimed at preventing former employees poaching staff, and usually applies to key people within the business.
- Non-competition with the employer. This is aimed at preventing former employees setting up a business or otherwise working in competition with the employer, usually within a specified geographical area.
Restrictive covenants are only enforceable if they are no wider than necessary to protect the legitimate business interests of the party seeking to enforce them. Business interests which are open to protection include trade secrets, trade connections, goodwill and an employer’s relationship with its workforce.
Restrictive covenants must be very carefully drafted, and consideration must be given to the period of each covenant, which usually ranges from six to 12 months. To maximise their enforceability, covenants must reflect the nature of the business of the employer and the employee’s position (seniority). It will be more difficult to enforce post termination restrictions on more junior employees.
A non-compete restriction (referred to above) is often the most difficult to justify. This is because as a matter of public policy courts will not wish to uphold provisions which prevent competition unless the business has shown good reasons. If, for example, a non-solicitation provision is sufficient to protect the business, then a non-compete provision is unlikely to also be necessary.
In a recent case (Capgemini India Private Ltd v Krishnan) an employer sought to obtain an interim injunction (interim interdict in Scotland) to prevent former employees acting in breach of a non-dealing covenant for which they had provided an undertaking in respect of after their employment had ended. The Court had to consider two conflicting principles: (1) that the terms on which a dispute had been settled should be respected and (2) restraint of trade. The employer was unsuccessful and did not obtain the interim injunction. The facts of the case are unusual, however it serves as a reminder that agreeing restrictive covenants in a settlement agreement or other contractual document is not a bar on the restraint being challenged.
The law surrounding restrictive covenants is a notoriously difficult area and therefore should you wish any guidance on a restrictive covenant already in place or wish to include covenants within contracts of employment or settlement agreements, it is strongly advised you seek legal advice.
Please let us know if you require any advice on any aspect of employment law.