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25-09-2014

The starting point with post-termination restrictions is that a contractual term restricting an employee's activities after termination of their employment is void as a restraint of trade and contrary to public policy, unless the employer can show that it has a legitimate interest to protect and the restriction is no more than is reasonably necessary to protect the interests of the parties and the public interest.  The upshot of this is that:

  • Post-termination restraints will be enforceable if they are reasonable.
  • Restrictions in employment contracts are harder to enforce than in other commercial contracts such as sale agreements or partnership agreements, where there is more equality of bargaining power between the parties.
  • It is for the employer to show that a restraint is reasonable and that it is designed to protect a proprietary interest of the employer for which the restraint is reasonably necessary. Customer contacts will count as proprietary interests.
  • Generally, it is easier to enforce non-solicitation clauses than a non-compete clause.
  • The question of reasonableness is looked at, at the time the parties enter into the contract.  It is therefore important to review restrictive covenants periodically such as when an employee is promoted, changes roles or receives a substantial pay rise.
  • In terms of customer or client connections, a restriction is more likely to be enforceable if it is reasonable both in time and scope.  It is often argued that restrictions should fail because their geographical location is too wide, but this is too simplistic when looking at businesses which trade globally.

Drafting Tips:

  • Look at the seniority of the employee and their access to confidential information. 
  • Consider how long after the employee’s employment terminates such information is likely to remain useful and confidential.
  • Consider whether or not the restraint needs to be global or whether or not it would be reasonable having regard to the location of customers and other factors to limit the restriction geographically.
  • Consider the interaction between the length of the restriction and garden leave or notice periods.  A restriction may be more enforceable if it is reduced by any prior period spent on garden leave.
  • Make sure that the restriction is appropriate at the point the employee signs the contract.
  • Review and update restrictions as and when employees are promoted or change roles.
  • Make sure that the restrictions are proportionate as between employees.  It will be difficult to justify a restriction that is longer for a junior employee than it is for a senior employee in a similar role.
  • Consider the nature of the restriction.  Is a non compete clause actually necessary, will a nonsolicitation clause suffice.  Do you need to make provisions to try and prevent a move by teams of employees?
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