Whilst restrictive covenants are not meant to prevent you from earning a living following an exit, the reality is that many city employment contracts generally contain some strong post-termination restrictions, which can impact significantly on where employees can go next and what they can do.
The courts take the view that a balance needs to be struck on the one hand to protect an employer’s legitimate business interests but on the other hand employees must be allowed to take their skills elsewhere in the spirit of a free market. Restrictive covenants need to be reasonable to be enforceable and provide employers with no more than adequate protection.
At the point of entering into a new employment contract sometimes the implications of the restrictive covenants are overlooked by employees.
Yet this could be the best opportunity that you have to negotiate over how restricted their future may be.
It is not uncommon to see a full set of restrictive covenants in employment contracts including non-compete, non-deal and non-solicitation (clients and colleagues) restrictions. I am often asked if it is okay to continue dealing with clients following a termination of employment since the client followed the employee and there was no active solicitation. The answer to this is no, if there is a non-deal restriction that prevents dealings with clients at all no matter who approaches who.
However, employers need to be able to justify the need for restrictive covenants, as well as the length and scope of the restrictions. If a non-solicitation and non-dealing clause suffices to provide an employer with protection, there may not be any justification for a non-compete clause as well. A non-compete restriction is generally seen as the most controlling form of restriction.
Where employers insert the same restrictive covenants in all contracts without regard to the protection needed for specific employees at a particular level of seniority, there could be an argument about enforceability. Restrictions are supposed to be individually tailored and specific.
Non-solicitation and non-deal restrictions should be linked to those with whom the departing employee had dealings – in other words, over whom influence could be exercised – for a prescribed period of time before leaving. These should not extend further than that or the restriction could be seen to be too wide. Similarly, the restriction should be limited to the solicitation of a senior or technically-skilled individual.
A 12-month restriction in an employment contract is as long as a restriction can be and this length of restriction should be confined to the most senior executives. It is arguable that employers should be able to consolidate their client base and connections in a much shorter period of time. Time spent on garden leave can be set off against the overall length of the restriction.
Garden leave generally seems to be a misunderstood concept. It is a means by which employees serve out their notice not attending work and not having dealings with clients or employees for a certain period. Some employers see it as a safer way of protecting interests if there could be doubts about the enforceability of restrictive covenants. However, the clock needs to be ticking in terms of notice for the period to be truly garden leave. If notice has not been served, it is not garden leave.
Where employers insert the same restrictive covenants in all contracts without regard to the protection needed for specific employees at a particular level of seniority, there could be an argument about enforceability. Restrictions are supposed to be individually tailored and specific.If an employment contract contains restrictions that go too far and are, therefore unenforceable, there may be little to worry about. However, sound legal advice should be obtained in advance of an exit to ensure that this is in fact the case. Some employers use lengthy restrictive covenants to have a deterrent effect even where there are doubts about enforceability.
It may be possible to rely on a constructive dismissal argument to negate the existence of restrictive covenants but again a well thought through strategy and paper trail is advisable before going down this route.
A constructive dismissal is a resignation in response to an employer’s breach of contract, which can be turned by the employee into a dismissal.
The result of the employer breaching an employment contract is that the obligations in that contract on the employee fall away. The breach of contract usually relied on is a breach of the duty of trust and confidence, which is implied into every employment relationship. It is important to resign quickly as delay is fatal to a constructive dismissal claim. A relatively minor act by the employer may be sufficient if it is the last straw in a series of incidents. It may be that the threat of resigning and claiming constructive dismissal is in itself enough to bring about a negotiated exit and a review of restrictive covenants.
Where employment ends as a result of a mutually agreed departure, documented in a settlement agreement, there may well be an opportunity to renegotiate restrictive covenants. Financial considerations are not always at the forefront when employees have found a new home and the priority is to be freed up to join a new employer quickly and easily.
It may not only be restrictive covenants that lock employees in however. There may be an extremely long notice period, which employees are required to work out or spend on garden leave. Alternatively, I have seen signing-on bonuses which are payable at different stages, requiring employees to be in employment at the relevant payment date together with an obligation to repay tranches of the bonus if they leave employment early. The deterrent of needing to pay back a sum of money goes against a departure and can tie employees in significantly.
In the current post-Brexit economic climate and with an uncertain year ahead being free and less restricted to take up new opportunities could be more important than ever before for employees. It’s important to know where you stand before you sign up with a new employer.
About the author
Rhian Radia, is the Head of employment law at Hodge Jones & Allen.
