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What HR Need to Know on Post-Termination Restraints / Restrictive Covenants

16/03/2023

What HR Need to Know on Post-Termination Restraints / Restrictive Covenants (March 2023)

We have supported businesses on the legalities of drafting post-termination restraints / restrictive covenants and thought it might be helpful to set out a short summary of the law explaining restrictive covenants and their uses.

Post-termination restraints / restrictive covenants are contractual clauses that restrict or restrain what an employee can do after their employment ends.

They commonly come as a set of ‘cascading’ terms and are usually combined with Garden Leave and Pay in Lieu of Notice (PILON) clauses.

The legal position is that post-termination restraints / restrictive covenants are void as an unreasonable restraint of trade unless the employer can show that they are reasonable and go no further than necessary to protect the legitimate interests of the business.

If the clauses are too wide, the Courts will use the ‘blue pencil’ test to strike out the offending parts that go beyond what is necessary to protect the legitimate interest of the business e.g. terms that are geographically too wide or which extend for too long a period of time.

Courts will not however rewrite or insert any additional wording into the clause but will read the remaining parts and only uphold the clause if it remains a reasonable restraint. This is the reason why cascading clauses are used; if one clause is struck out, then the next clause may be found to be reasonable.

To ensure that post-termination restraints / restrictive covenants are enforceable, businesses should tailor them specifically to the post and/or the person they relate to. The question businesses should ask themselves is what harm could this person do to the business if they were to leave?

Below is a list of types of post-termination restraints / restrictive covenants clauses set out in cascading order from most restrictive to least restrictive:

  • Non-Compete: prevents a person from joining a rival employer for a defined period after termination. This is the widest and most restrictive of the clauses as it effectively places a bar on free movement, therefore careful drafting is required as it will be scrutinised by the Courts.

 

  • Non-Dealing: prevents a person from approaching, or accepting an approach from, clients or customers of a former employer for the provision of services. It must be defined to those that they know are clients or customers of the business.

 

  • Non-Solicitation: prevents a person from approaching a client or customer of a former employer with a view to obtaining their business. However, they can accept work if approached by the client or customer. Again, it must be defined to those that they know are clients or customers.

 

  • Non-Solicitation of Employees: (also called non-poaching) prevents a person from approaching existing employees to come with them. It must be defined to those that they know are employees.

Legal enforcement is usually by way of an injunction, an order which prevents the person from carrying out the restricted act.

Commonly, businesses will first adopt a softer approach of writing to employees and seeking an undertaking that they will not breach a post-termination restraint / restrictive covenant. They may also write to the new employer drawing attention to the clause and stating that they may consider action for unlawful inducement to breach contract.

Those of you who enjoy case law may be interested in reading the only Supreme Court case on this subject, Tillman -v- Egon Zehnder Ltd [2019] UKSC 32.

Please note that this is not a comprehensive guide, but a rough outline only. For further guidance, contact one of the legal team at info@eefni.org