AT A GLANCE
Post-termination restrictive covenants are fairly common in English employment contracts, particularly for senior employees or those with valuable connections, relationships or access to confidential information. However, they are unenforceable unless an employer can establish that (i) it has a legitimate business interest that it is seeking to protect; and (ii) the restriction goes no further than is necessary to protect that interest.
GENERAL PRINCIPLES
Non-competition, non-dealing and non-solicitation restrictive covenants are only enforceable under English law if the employer can demonstrate that:
- it has a legitimate business interest that it is seeking to protect; and
- the restriction goes no further (in scope and duration) than is necessary to protect that interest.
Restrictive covenants are not governed by statute; they are instead dealt with through case law.
LEGITIMATE BUSINESS INTERESTS
Legitimate business interests include trade secrets, confidential information, trade connections, and maintaining the stability of the workforce.
SCOPE AND DURATION
The scope and duration of the restriction should be limited and reasonable. Whether a restriction is reasonable is judged at the time the restriction is entered into.
Relevant considerations include the employee's role, duties and seniority, the nature of the employer's business, the scope of the restriction (e.g., what type of activity, trade connections, geographical scope) and its duration. Generally, the longest acceptable duration is 12 months, subject to certain caveats (see below).
CONSIDERATION
For a new employee, the offer of employment and receiving of salary and benefits is sufficient consideration for entering into new restrictive covenants. For an existing employee entering into new restrictive covenants, additional consideration (e.g., a pay rise or additional benefit) will be required. Continued employment is not sufficient.
OTHER CLAUSES
The inclusion of the following clauses with restrictive covenants helps with enforceability:
- reduction of the duration of covenants by any time that the employee spends on garden leave (when they continue to be employed under the contract of employment but have no active duties or work to do);
- exclusion of minor shareholdings held by the employee, activities which are outside the area in which the employer operates and work that involves services or activities with which the employee was not involved while employed by the employer; and
- severability.
PAYMENT
There is no legal requirement to pay employees during the period of a post-termination restriction.
"BLUE PENCIL TEST"
Restrictive covenants that are invalid are unenforceable. A court can apply the "blue pencil test" and sever a particular element that is considered invalid and uphold the remainder of the restrictive covenant. However, a court will not re-write a covenant. It will only apply the "blue pencil test" if the unenforceable element can be severed without having to modify or add to the remaining wording and if, by doing so, it does not materially change the nature of the original restrictions.
NON-COMPETITION
The above general principles apply to non-competition restrictive covenants.
For management and senior employees, non-competition restrictive covenants are usually between six to nine months, with very senior individuals being subject to 12 months maximum. Non-competition covenants usually apply for shorter durations than non-dealing and non-solicitation covenants.
NON-SERVICE OR NON-DEALING
The above general principles apply to non-service or non-dealing restrictive covenants.
Non-service tends to cover active targeting of business whereas non-dealing prevents the employee from accepting business from a customer, even if they had not actively sought the business.
Prospective customers/clients can be included in this type of restriction but this would generally be limited to those that the employer was actively targeting prior to termination.
These restrictive covenants are often limited to prohibiting contact with customers/clients actually known to the employee or for whom they were responsible or had some involvement with in the course of their employment. They are usually defined by reference to a limited period of time before termination (e.g., those they had contact with in the six or 12 months before termination).
NON-SOLICITATION
The above general principles apply to non-solicitation restrictive covenants.
Prospective customers/clients can also be included in this type of restriction but this would generally be limited to those that the employer was actively targeting prior to termination.
As with non-dealing restrictive covenants, these are often limited to solicitation of customers/clients actually known to the employee or for whom they were responsible or had some involvement with in the course of their employment. They are usually defined by reference to a limited period of time before termination (e.g., those they had contact with in the six or 12 months before termination).
Usually, non-solicitation of employee restrictive covenants will define the employees who cannot be solicited by reference to their seniority, grade or level, or their role or importance to the business. They often only apply to colleagues that the departing employee had a reasonable level of contact with, knowledge of or responsibility for, and within a defined period before the departing employee leaves.
ON THE HORIZON
In 2023, the UK government announced proposals to limit the duration of non-compete restrictive covenants in employment contracts to three months.
There is no current timeframe given as to when this change could become law. This cap would not apply to non-solicitation restrictive covenants or to non-compete provisions outside of employment contracts. However, it may mean UK businesses will need to consider other ways to protect their business, such as longer notice periods.
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