Employment Contracts – the importance of post-termination restrictive covenants

Departing employees are often well-placed to take advantage of confidential information, strategic plans, customer and client details or other information about their employer’s business, after the termination of their employment. They may attempt to use this information for the benefit of their new employer or in order to set up a rival business. This can seriously harm the former employer’s business and potentially result in major breaches of data protection legislation which may require the business to notify statutory agencies such as the Information Commissioner’s Office and result in fines or claims for damages.  It is often overlooked that data theft is also a criminal offence.

Although employees must observe certain terms that are implied into every contract of employment, these are of a limited nature and do not generally extend to the period after termination of the contract. Restrictive covenants and confidentiality clauses are regularly used in contracts of employment as a protective measure for employers. An employer is entitled to protect its legitimate business interests and seek to prevent employees from acting contrary to the interests of the business. In addition to creating an express duty of confidentiality, typical covenants will usually prohibit the following types of activity for a restricted period following the termination of the employment contract:

• Working for direct or named competitors
• Setting up a business in competition with the employer
• Poaching or employing key employees from the employer’s business
• Soliciting or canvassing business from clients of the business or dealing with clients or customers of the business with whom they had material contact.

Employees may argue that post termination restrictions are void on the basis that they are a restraint on trade and contrary to public policy and in the event of a dispute between the parties, the Courts are often required to adjudicate on the enforceability of particular covenants.  Carefully drafted covenants are essential and to ensure that a business can rely on its restrictive covenants, it must be able to show that they are designed to protect the legitimate business interests of the organisation and go no further than what is reasonably necessary to protect those interests.

Restrictive covenants having the sole aim of preventing competition will not be upheld by the court. A non-competition restriction must be designed to protect the employer’s confidential information, trade secrets or customer connections, and prevent the employee from obtaining an unfair advantage by exploiting these for their own, or another employer’s, benefit. Non-solicitation clauses are therefore looked on more favourably than pure non-competition clauses.

Where the covenants are contained in a contract of employment signed at the start of the employment relationship, there is no need to assign specific financial consideration to the restrictive covenants as consideration will take the form of the employee’s regular salary, benefits and any other remuneration paid by the employer. However, an issue as to their enforceability may well arise where restrictive covenants are introduced later in the relationship, for example where the employee is promoted or where the employer has updated their standard contracts  to include new restrictive covenants; if the employer does not provide specific and adequate financial consideration to the employee for entering into the new or revised covenants.

Worthingtons Solicitors routinely act on behalf of employers in relation to civil litigation, including injunctive relief applications, negotiating undertakings,  enforcing post termination restrictions and pursuing damages claims arising from breaches of restrictive covenants and in the absence of enforceable covenants, the employee’s implied duties of fidelity and confidentiality under the contract of employment.  

Louise McAloon is a Partner in Worthingtons Solicitors specialising in employment law. For legal advice in relation to contracts of employment or protecting business interests through restrictive covenants, please telephone 028 90434015 or email [email protected].