Restrictive Covenants

Understanding Post-Termination Restrictions:

Employment contracts are replete with clauses designed to shield a company’s interests post-employment. Here’s a breakdown of some common ones:

Confidentiality Clause: This mandates former employees to refrain from divulging sensitive company information such as pricing structures and client lists.

Non-Solicitation Clause: This bars former employees from soliciting business from the company’s clientele, whether as self-employed individuals or as employees of competitors.

Non-Dealing Clause: Comparable to non-solicitation, this prohibits former employees from engaging in business with the company’s clients, even if initiated by the clients themselves.

Non-Compete Clause: Arguably the most recognised, this confines former employees from working for competitors or establishing rival enterprises. It often encompasses geographical limitations to prevent local competition.

Non-Poaching Clause: This prohibits former employees from enticing current staff members to depart and join their new ventures.

The Reasonableness Test:

While these clauses aim to safeguard the company’s interests, they must also meet the threshold of reasonableness. A clause may be deemed reasonable if it:

• Prevents the former employee from partaking in direct competition, poaching, or disclosing confidential information only.
• Typically lasts between 3 to 6 months.
• Encompasses a rational geographical scope.

Conversely, a clause may be deemed unreasonable if it:

• Prevents the former employee from engaging in unrelated work.
• Extends beyond 6 months.
• Pertains to information already in the public domain.
• Encompasses an excessively large geographical area.

Tailoring to Specific Needs:

The duration of post-termination obligations can vary based on the seniority of the role and the industry. Senior positions in specialised industries may necessitate lengthier durations to safeguard trade secrets and client relationships effectively.

Achieving Equilibrium:

For these restrictions to be considered ‘reasonable’ they must afford adequate protection to the company without unfairly limiting the employee’s ability to earn a livelihood. It’s imperative to demonstrate that the restrictions are no broader than necessary to safeguard legitimate business interests.

In Conclusion:

Comprehending post-termination obligations is pivotal for both employers and employees. While these clauses serve to protect the company’s interests, they must also be equitable and justifiable. Striking the right balance ensures a smooth transition for both parties, mitigating the risk of unnecessary legal entanglements.

As part of the advice service, we are often asked to consult on enforcing post-termination restrictions, recognising that their enforceability can be contentious. We offer a compliant Senior Level Employment Contract as part of our 2024 HR Policies, empowering clients to maximise their chances of success. However, the efficacy of these measures ultimately hinges on the unique circumstances of each arrangement and whether they meet the ‘reasonableness test’.

If you’re concerned about safeguarding your business or specific areas thereof upon the departure of a key employee, reach out to us for a review. We can proactively ensure your employment documentation is compliant, providing you with the utmost protection in 2024 and beyond.

Checklist for enforcing a Restrictive Covenant:

Pre-Employment:

• When issuing a contract to a new hire, ensure it includes a suitable restrictive covenant commensurate with their role’s seniority and exposure to sensitive information.
• If providing the covenant separately, ensure it’s duly signed and explicitly marked as part of the employment contract.
• For internal role shifts, issue a fresh contract with an appropriate covenant, accompanied by consideration to render it legally binding.
• Upon granting more responsibilities or access to sensitive information, review and update restrictive covenants accordingly, offering due consideration for legal validity.

During Employment:

• Regularly review and update restrictive covenants across the organisation to ensure accuracy and relevance.
• Evaluate the necessity of including restrictive covenants for employees lacking them, based on their duties and information access.

Upon Resignation:

• Establish a protocol for Saphire HR be promptly notified upon employee resignation.
• Upon resignation, undertake the following steps:
• Verify the presence of a signed restrictive covenant in the employment contract.
• Enquire about the next employer and role, if applicable, while reminding the departing employee of their contractual obligations. There should be a requirement placed in the initial employment contract placing a duty on the employee to disclose this.
• If no covenant exists, emphasise the general duty to safeguard company information.
• Implement measures to mitigate risk, such as reassigning sensitive projects or considering garden leave, if contractually viable. Speak to a Sapphire HR Consultant for further advice on garden leave.

Post-Employment Vigilance

• Monitor for potential breaches of restrictive covenants post-employment.
• In case of suspected breach, formally instruct the ex-employee to cease actions and warn of potential enforcement.
• If deemed appropriate, notify the new employer of the restrictive covenant and intentions for enforcement.
• Initiate pre-action protocol and pursue enforcement measures if loss to the business is evident.