An employer can enforce contractual restrictions after termination of employment, which is a complex and often misunderstood area of law. The restrictions after termination of employment (usually referred to as restrictive covenants) can dictate your next professional steps and bind you legally even beyond your last day on the payroll. From non-compete clauses that restrict working with competitors to non-solicitation and confidentiality agreements protecting your former employer’s interests, these covenants have a lasting impact. This article unpacks their legality, enforceability, and effect on your career, ensuring you know precisely where you stand after employment ends.
Key Takeaways
- Post-termination restrictions must protect employers’ legitimate business interests and only go as far as reasonable to do so.
- For example, the restrictions must be reasonable in scope and duration to be enforceable.
- Restrictive covenants, including non-compete, non-solicitation, and confidentiality agreements, should be carefully tailored and periodically updated to reflect changes in an employee’s role to remain enforceable.
- Post-termination restrictions can significantly impact an employee’s future career prospects, leading to potential disputes and requiring a balance between employers’ interests and employees’ right to work.
- When negotiating an exit, or looking for alternative employment, it is important to factor in any restrictive covenants in your employment contract.
Understanding Post-Termination Restrictions
Post-termination restrictions, also known as post-termination restrictive covenants, are contractual obligations that continue even after the employment relationship ends. These restrictions are designed to protect an employer’s business interests, such as relationships with customers, clients, and suppliers, and safeguard confidential information. The idea behind them is to prevent employees (particularly senior executives) from moving to a competitor with sensitive information/contacts and causing damage (such as poaching staff or customers).
Restrictive covenants can legally prevent employees from competing with their former employer’s business after employment has ended. However, it’s crucial to remember that courts will enforce these covenants if and only if they are reasonably necessary for protecting these legitimate interests and are not excessively broad in scope.
Disputes often arise from these covenants at the end of employment, sometimes due to deliberate breaches by ex-employees, such as ‘poaching’ clients.
In redundancy situations, employers may incorporate these covenants into contracts to prevent the ex-employee from sharing sensitive information or influencing client relationships, thus protecting the business during the transition.
Understanding Non-Compete Clauses
A non-compete clause is a common post-termination restriction that prevents an employee from competing with their former employer, often within a certain geographic scope and for a specific period after leaving. For example, a non-compete clause may prevent the employee from joining a named competitor (or all competitors within a defined radius) for a certain period of time (generally, longer periods are harder to enforce).
Factors such as the employee’s level of seniority and access to confidential information can influence the justification for the duration of a non-compete clause. Determining if a non-compete clause is enforceable will be case-specific and depend on individual circumstances (such as the relevant position and business interests) and how the clause is drafted.
The Role of Non-Solicitation Clauses
Alongside non-compete clauses, non-solicitation clauses also play a significant role in post-termination restrictions. These clauses prevent former employees from contacting the previous employer’s clients to persuade or encourage them to take their business away from the former employer. Non-solicitation clauses are designed to protect the employer’s legitimate interests by preventing customer or client poaching and are generally more likely to be enforceable than a non-compete clause.
However, these clauses can sometimes create challenges for employees, particularly those in sales roles. An employee may work for a competitor but can be restricted from effectively performing their role due to a non-solicitation clause. Non-solicitation clauses are often aimed at protecting staff, to prevent the situation where an employee leaves and then persuades previous colleagues to join them.
Confidentiality Obligations Post-Employment
Confidentiality obligations post-employment, another type of post-termination restriction, prohibit former employees from revealing sensitive business details. These clauses are particularly crucial as they prevent the employee from disclosing sensitive business information about the employer or its clients after the termination of their employment.
Such clauses ensure that trade secrets, customer information, and other proprietary data remain protected, even after an employee has moved on to other opportunities.
Restrictions After Termination of Employment – Enforceability
The enforceability of restrictions after the termination of employment is usually the main battleground and subject of dispute. It is not uncommon for employees to sign contracts with stringent restrictive covenants, which they pay little attention to until they start looking for a new role (or even after accepting a new one).
The enforceability of post-termination restrictions depends mainly on their reasonableness and necessity for protecting legitimate business interests. Drafting post-termination restrictions must be precise, with clear timelines, geographies, and activities, and tailored specifically to individual roles to avoid being unenforceable due to overbreadth or unreasonableness.
It’s also crucial for employers to reevaluate and potentially update these covenants, primarily upon an employee’s promotion, to ensure that they remain enforceable and reflective of the employee’s new role. To ensure enforceability, post-termination restrictions should not only be drafted and relevant to the employee’s role but also be communicated effectively to the employee, potentially with additional legal considerations such as a pay rise or promotion.
If you are considering a new role that may breach a restrictive covenant, it is crucial to understand how to tackle this issue. Disputes over restrictions can be complex and costly to both sides. The negotiation of restrictive covenants is often dealt with in settlement agreement negotiations.
Geographic and Temporal Scope of Restrictions
The geography and scope of restrictions are critical factors in determining their enforceability. These covenants must be limited in time, typically not exceeding 6 to 12 months, with courts rarely upholding clauses of longer duration without clear grounds for doing so (although one should not presume a clause is not enforceable simply because of its duration).
Common factors pointing toward a restrictive covenant being enforceable are:
- narrowly tailored to protect legitimate business interests without overly restricting trade
- proportional to the employer’s need for protection
- adhere to reasonable geographic areas and durations
Courts are more likely to enforce post-termination restrictions that meet these criteria.
Employer’s Rights vs. Employee’s Future
While restrictive covenants protect employers’ rights, they can also significantly impact an employee’s ability to work in their chosen field post-termination. Therefore, built-in compensation for employees during the restrictive period can mitigate the negative impact on their financial future.
Not all post-termination restrictions are enforceable, which can lead to uncertainty and disputes affecting the employee’s career. Employees may face significant financial loss due to the inability to find comparable employment within the restrictions of a non-compete clause. Restrictive covenants are more prominent in specific fields like finance and technology. Understanding how to progress in your career without prompting high-court litigation is important.
Restrictions After Termination of Employment – Legal Recourse
If a breach of post-termination restrictions is suspected, employers may take legal action, such as enforcing the restriction or suing for damages for breach of contract. It is best for such disputes to be avoided, which are costly to defend and can put off new employers. If you are not careful, you may burn your bridges with your ex-employer and have no new employer wanting to work with you in fear of being embroiled in a dispute.
Employers can take the following actions to address a breach of a restrictive covenant by a former employee:
- Apply for an injunction to prohibit the former employee from continuing to breach the covenant.
- Require the former employee to return or destroy any confidential information.
- Pursue financial damages, such as quantifiable lost profits or diverted opportunities due to the breach.
Transitioning Smoothly: Garden Leave Explained
Essentially, garden leave is where an employment relationship continues (usually for the duration of the notice period), but you are not expected to attend work. You will continue to be paid in the normal way. See Settlement Agreement Terms for common clauses/terms that become relevant at the end of an employment relationship.
Garden leave is a concept often included in employment contracts that allows an employer to restrict an employee’s activities during their notice period while still compensating them. During this period, employees might be required to stay away from the workplace or work from an alternate location, although they continue to be paid their regular wages and benefits.
Garden leave clauses are often used in conjunction with restrictive covenants to increase the period of time an employee is kept out of the market. For example, if someone is on gardening leave for 6 months, without contact with colleagues or customers, this may reduce the impact they have when changing employers. Employers must have the contractual right to place you on garden leave, so checking your employment contract carefully is likely to be important.
Navigating Settlement Agreements
When offered a settlement agreement, employees must take independent advice on the terms and effect of the agreement. If restrictice covenants are in the employment contract or added to the settlement agreement, the implications must be addressed and carefully considered. Always bring any restrictive covenants to your lawyers attention.
Thorough checking of settlement agreements for any restrictive covenants is crucial for employees to fully understand their post-employment obligations.
Employees should gather all relevant contractual documents and seek expert legal advice especially when bound by restrictive covenants. Restrictive covenants in settlement agreements can include non-compete, non-solicitation, non-dealing, and non-interference clauses to restrain former employees from certain actions after leaving a company.
Restrictive covenants in settlement agreements can be used to:
- Prevent former employees from joining competitors
- Prevent former employees from misusing confidential information
- Protect the business from unfair competition.
Constructive Dismissal and Restrictive Covenants
A contructive unfair dismissal starting point is when an employer commits a fundamental breach of the employment contract. If the employer has committed a fundamental breach of contract, then they may forego their ability to enforece any restrictive covenants in the employment contract. This is an important consideration (and often point of disputes) in cases where the employee seeks to argue there has been a constructive unfair dismissal and therefore a release from the restrictive covenants.
Preparing for Change: Government Reforms on Non-Compete Clauses
The landscape of post-termination restrictions is set to undergo significant changes with the UK government intending to restrict the enforceability of non-compete clauses to a duration of three months following the end of employment. This announcement was made in May 2023. This proposed limitation aims to enhance economic flexibility and competition, potentially allowing employees to more easily engage with competitors or start their own businesses after leaving their current employment.
However, the proposed three-month cap will not affect other forms of restrictive covenants, such as non-solicitation and non-dealing clauses, allowing businesses to continue protecting their interests through these measures. The change will apply to employment and worker contracts, but settlement agreements, along with partnership and shareholder agreements, are currently excluded from the three-month cap. The impact of the legislative change on existing non-compete clauses exceeding three months is yet to be clarified by the government.
Expert Guidance: Seeking Professional Advice
Employment law experts play a crucial role in the realm of post-termination restrictions. They are essential for:
- reviewing or drafting these covenants to comment on their enforceability
- to give advice to people seeking to exit a business with restrictive coventants in the contact of employment
- providing representation for individuals challenging restrictive covenants in their contracts
- working towards having them invalidated or modified if necessary
Key employees who plan to leave their job for a competitor, or are unhappy with a restrictive covenant in their employment contract, can receive advice on compliance and protect their professional interests by consulting with Employment & HR Solicitors, ensuring they do not harm their employer’s business.
Summary
Understanding post-termination restrictions is a critical aspect of navigating the complexities of contemporary employment contracts. These restrictions, while serving to protect the legitimate interests of employers, must be reasonable, necessary, and tailored to individual roles. As these restrictions can significantly impact an individual’s career and financial stability, seeking expert legal advice is invaluable. As the landscape of employment law continues to evolve, staying updated on new reforms and understanding their implications is crucial.
Frequently Asked Questions
What is a restrictive covenant in an employment contract?
A restrictive covenant is a clause in an employment contract, such as a ‘non-compete’ clause, that prevents employees from certain conduct (such as joining a competitor or poaching customers) after the employment relationship has ended.
What is the time period for a restrictive covenant?
The time period can be hatever the parties orginally agreed, but will be a relavant factor in relation to enfroeceability. A restrictive covenants are typically drafted to last for 3, 6, or 12 months after an employee has left their position, aiming to prevent contact with clients/customers/contacts of the employer.
Are restrictive covenants enforceable after redundancy?
Yes, restrictive covenants are enforceable after redundancy as an employer is entitled to impose them on a redundant employee to protect their business interests.
What is the purpose of non-compete clauses?
Non-compete clauses are used to prevent employees from ending their employment to go and work for a competitor.
What are non-solicitation clauses?
Non-solicitation clauses prevent former employees from convincing the employer’s clients, staff or suppliers to move away from the former employer. So, they are meant to protect the employer’s relationships.