The enforceability of post termination restrictions in employment contracts are one of the most common queries we receive here at BPE, with queries coming from both employees and employers alike. My colleague, Nick Rowe, has recently published an article which outlines in detail what restrictive covenants are and how they can be used to benefit employers. A link for Nick’s article is contained at the bottom of this article and if you are unfamiliar with topic, is a good starting place to brush up your knowledge.
Briefly, post-termination restrictions are clauses in an employment contract which limit activities which employees can undertake should they leave the business. These restrictions often include not competing with the business or the non-poaching of clients or employees. When considering the enforceability of post termination restrictions, each case has to be considered on its own merits, and what may be acceptable for one individual or company, may not be deemed reasonable for another.
The case of Quilter Private Client Advisers v Falconer and another, in the main related to a non-compete clause in an employment contract. Ms Falconer was a financial adviser. She joined Quilter to assist in taking over from a retiring financial adviser. Within her contract of employment were a number of restrictive covenants which was commonplace in the industry for such a position. The restrictions contained a clause restricting Ms Falconer from competing with Quilter for nine months after leaving their employment, with further clauses restricting her from dealing with or soliciting clients of Quilter should she ultimately leave the company.
Very quickly after joining Quilter, Ms Falconer came to the realisation that she did not enjoy working for the company. Within a period of 6 months from her start date, notably still within her probationary period, Ms Falconer handed in her notice. As the resignation was submitted during her probationary period, Ms Falconer’s contractual notice period was only two weeks. At the request of the company, the notice period was spent on garden leave.
Following her employment terminating with Quilter, Ms Falconer joined Continuum, a competing company, albeit as a self-employed independent financial adviser. Due to the restrictive covenants in her contract, Quilter believed Ms Falconer to be in breach of contract and brought a claim against her in the High Court. Quilter also made an application for an interim injunction to enforce the restrictive covenants in the period leading up to the full hearing. It also alleged further breaches of contract, including that Ms Falconer had not devoted her whole time and attention to her work for Quilter, had taken confidential information, breached her duty of fidelity, and contacted clients during her garden leave in breach of the express terms of her employment contract. Quilter also added the new employer, Continuum, to proceedings for inducing Ms Falconer to breach her contract.
The court granted the interim injunction against Ms Falconer. As a reminder, an interim injunction in this context is a court order stopping an employee from carrying out an activity, which would or would likely be in breach of contract, in this case the employment contract from the previous employer, until a hearing can be held to determine the matter in full.
At the full hearing, the High Court had to consider whether the post termination restrictions contained in Ms Falconer’s contract with Quilter were reasonable, and if so, were they enforceable in this particular set of circumstances.
In its judgment, the High Court allowed Quilter's claim in part. The key takeaway, however, was the finding that the main restriction, that of non-compete against the company, was deemed to amount to a restraint of trade, making the restriction unenforceable.
In coming to its judgment, the High Court considered the following points:
- The notice period during Ms Falconer’s probationary period was only two weeks, and so the restriction envisaged employment lasting for a short period, but binding her to much longer restrictions;
- Ms Falconer would have had limited time to build relationships with Quilter’s clients;
- The scope of the restriction was too wide because it prevented her from working in the same field with clients who were not clients of Quilter;
- The restrictions were longer than more senior individuals at Quilter;
- The carve-outs to limit the restrictions were not effective;
- The restrictions limited her from working with individuals ‘materially concerned’ with her, which was excessively wide.
What does this mean for you or your business and what do you need to be doing now?
Employers should ensure that post termination restrictions are considered carefully and not simply rolled out en masse to every employee in standard form.
Restrictions can still be used to ensure that you can protect your legitimate business interests. However, this has looked at how reasonable it is to enforce them – if someone was in their probationary period, there is lower risk of the employee obtaining sensitive business information, key business relationships and contacts due to having much lower exposure to the business than an individual who has been in senior management for a number of years.
For individuals such as this, the practical guidance is that there was limited benefit in pursuing such a matter through the courts.
However, the best advice to take away is that restrictive covenants should be reviewed to ensure that they do not go further than is necessary. They cannot be so broad as to stop an individual from working, it needs to be used solely to protect your interests.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.