Clauses in employees' contracts that stop them from approaching or dealing with their employer's customers when they leave ('restrictive covenants' in legal jargon) must be reasonable or the court won't enforce them. And the courts will presume they are unreasonable unless the employer can prove they are 'no more than is reasonable to protect [the employer's] legitimate business interests'. Therefore, it is important to look at the relevant individual circumstances when deciding on restrictions and not just putting in place, generic precedents.
This is an area of the law where there have been a lot of legal disputes, which means key principles have emerged. For example, when assessing reasonableness, the court will take into account factors such as:
- how long the restrictive covenant lasts;
- whether it only applies if the employee's new job is within a certain distance from the premises (or territory) the employee worked at (or in) in his or her old job;
- whether it stops the ex-employee from dealing with all or any of their ex-employer's customers, or just the ones they were taken on to deal with as part of their job.
When deciding whether restrictions in an employee's contract are reasonable, the court will take into account:
- other clauses in the contract, such as the period of notice an employee has to give if they want to leave. For example, a short notice period will undermine an employer's argument that restrictions are justified because an employee is important and difficult to replace;
- what other employees' contracts say. For example, it will be hard to argue restrictions are justified for one employee if they are not included in the contracts of similar employees.
Other principles arising from different court decisions include:
- it can be unreasonable for employers to try to stop employees who deal directly with customers from taking on a role in a competing business – in management, for example – where they will not be working directly with clients;
- if a non-compete clause in an employee's contract was unreasonable when the contract was signed, it does not later become enforceable just because the surrounding circumstances change;
- it will usually be unreasonable to stop ex-employees from having any interest at all in a competing business (which would include owning a share in a publicly quoted competitor); and
- the fact a 'ready-made team' of employees, with close connections and shared skills, leaves together does not give their former employer any greater entitlement to an injunction than if a single employee leaves.
Effectively, the restrictive covenants in an employee's contract must be drafted specifically for that employee (or class of employees) to ensure that they are reasonable in the circumstances – for example, taking into account the employee's role and responsibilities, the nature of the employee's business, what the contracts of other employees say and whether the employee leaves alone or defects to a competitor as part of a group.
Employers are strongly recommended to take legal advice when considering what restrictions to impose on ex-employees in their contracts of employment, and to review those restrictions periodically, to ensure the courts will treat them as reasonable and therefore enforceable.
For more information please contact Ian Dawson at Shulmans on 0113 297 7735 or at firstname.lastname@example.org.