Last year, Alfred Feld died aged 98 following more than 80 years of service at Goldman Sachs. Since it’s likely that most SME employees are no Alfred Feld and will leave your business at some point, how should small businesses protect themselves after those employees walk away?
Employees often have strategic information regarding the clients and business of their employer, together with specific knowledge of technology that may be helpful to competitors. Members of staff are subject to an implied, and often express, duty of confidentiality. However, this duty may not be enough to protect the business after their employment ends.
To try to control the use of the business information when an employee leaves one approach is to include post-termination restrictions in an employment contract. These post-termination restrictions break down into four types of restriction; non-compete, non-solicitation of clients, non-dealing with clients and non-poaching of staff. Essentially they are promises (covenants) that an ex-employee won’t compete with the former employer, won’t try to poach clients, won’t deal with clients whether they have poached them or not, and won’t try to get colleagues to come to their new employer.
How to enforce competing restrictions
With the protections they offer in mind, wouldn’t every employer impose unlimited post-termination restrictions on an ex-employee? No, because clauses in an employment contract that attempt to restrict the employee’s right to compete can’t be enforced if they impose unlawful restraints on trade. However, the restrictions will be enforceable provided they are reasonable, and go no further than necessary to protect the legitimate interest of the business.
This means that an employer wants the restriction to be wide enough to provide sufficient protection without being so broad that the ex-employee can be successful in arguing that the restriction is too wide and unenforceable. So when adding a provision, first you should choose the shortest period that will provide meaningful commercial protection.
There are a number of factors courts weigh up when considering if a post-termination restriction can be enforced. The courts look at different types of post-termination restrictions in different ways. For example, would a short non-solicitation and non-dealing provision for three or six months do enough to protect the employer’s business interests? If so, a non-compete restriction may well be deemed unnecessary and therefore unenforceable. Obviously the courts will consider the length of the restriction but the employer will have to think carefully about the particular circumstances of the case.
New changes allow longer restrictions
It used to be the rule of thumb that without some high-level industry secret to protect, a non-competition post-termination restriction of even 12 months would be hard to justify. However, this may have been debunked by a recent case where a post-termination restriction on an insurance broker not to poach clients for 12 months was valid on the basis that the renewal of insurance premiums arises annually, so the employer should have at least one opportunity to deal with the client prior to the ex-employee having a chance to pursue them.
The reasonableness of a clause always depends on its own specific facts. Not only do valid restrictive covenants vary between businesses, they can also diverge within one company, and need to be tailored to each individual. Also, what is seen as reasonable is tested at the time a contract is entered into, not at the time it is enforced. For example, if a junior employee rises through the ranks to become a marketing director, a post-termination restriction that would be enforceable for the senior role may not have been enforceable for the junior role, so may be struck down.
If employees have any shares in the company the employer can also agree shareholder restrictive covenants. The courts have so far been more lenient of longer post-termination restrictions in shareholder agreements than in employment contracts, proceeding on the basis that shareholders are in a far stronger bargaining position when it comes to agreeing any contract, and are in general less in need of court protection.
The crucial point to remember is that no one size fits all. Employers need to be ready to argue that each post-termination restriction protects legitimate business interests and goes no further than reasonably necessary to protect those interests.
Helen Curtis is a solicitor at Gannons
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