Are Post-Termination Restrictions in Employment Contracts Enforceable?
We are often asked by both employer and employee clients whether post-termination restrictions in employment contracts are enforceable. This is a regularly disputed issue when an employee leaves to start a new job in the same sector as their former employer. This article looks at how enforceable these restrictions are.
What are post-termination restrictions?
Post–termination restrictions in employment contracts, also known as restrictive covenants are contractual provisions that prevent an employee from doing something after the employment relationship has ended. They aim to protect the employer’s legitimate business interests after an employee leaves the business. The restrictions are intended to prevent the employee from competing with their former employer, soliciting their clients or employees, or disclosing confidential information.
Post-termination restrictions are often included in employment contracts for managerial positions or where employees have access to sensitive information, key clients or trade secrets. These restrictions aim to prevent employees from using their knowledge and relationships gained during their employment to the detriment of their former employer.
Joanne Briscoe, Associate Solicitor in our Employment team, comments:
“The employer wants to protect their legitimate business interests whilst the employee wants to move on to a new job using the skills and expertise that they gained whilst working for their former employer, and their new job is often working for a competitor. There has to be a balance found between their competing interests”.
How enforceable are these post-termination restrictions?
To be enforceable, post-termination restrictions must be reasonable in scope, duration, and geographic extent. The restrictions should go no further than necessary to protect the employer’s business interests.
They are only enforceable if they are designed to protect legitimate business interests, such as confidential information, trade secrets, customer connections, or goodwill. The employer must demonstrate a genuine need to protect these interests.
Employers must voluntarily agree to post-termination restrictions. These provisions should be clearly drafted, brought to the employee’s attention and ideally supported by additional consideration, such as a promotion, pay increase, or access to valuable training.
There is a balance between protecting the employer’s business interests and restricting an employee to find a new job.
Post-termination restrictions can limit an employee’s freedom to seek new employment or start their own business in a similar industry. An employee may face challenges securing alternative employment if their skills and expertise are restricted by the terms of their previous employment.
“Employees should consider the potential impact of any post-termination restrictions included in their proposed employment contract when they start a new job.”
The reasonableness of post–termination restrictions depends on factors such as the employee’s seniority, industry standards, and the nature of the business. The duration of restrictions should be proportionate to the time required to protect the employee’s legitimate interests. Similarly, the geographic scope should be limited to areas where the employer operates and has a legitimate business interest.
Enforcing overly restrictive post-termination restrictions can stifle competition and impede innovation. Striking a balance between protecting the employer’s interests and allowing employees to exercise their skills and expertise in a competitive market is crucial.
What can an employer do if there is a breach – enforcement and remedies?
- Employers can seek injunctions to prevent employees from breaching post-termination restrictions. However, courts will carefully consider the reasonableness of the restrictions and the potential impact on the employee’s livelihood before granting an injunction.
- Employers may claim damages if they can demonstrate financial loss resulting from a breach of post–termination restrictions. However, calculating damages can be challenging and employers must provide evidence of the actual loss suffered.
Government proposals to limit non-compete clauses
The government is proposing to limit the duration of non-compete clauses, (a type of post-termination clause that prevents an employee from leaving their job to work for a competitor) to three months. There is no date yet for this to be implemented but employers should take this into account when drafting post-termination restrictions. An employer will still be able to protect their business interests by the use of other post-termination restrictions such as non-solicitation clauses.
Post-termination restrictions play a significant role in protecting an employer’s legitimate business interests. While employment law recognises the need for such restrictions, their enforceability depends on their reasonableness, including the scope, duration and geographic limits.
“Striking the right balance between protecting employer’s interests and preserving employment mobility is crucial to foster a competitive and innovative labour market. Employers must carefully draft these provisions, ensure employee consent and be prepared to demonstrate the reasonableness of the restrictions if challenged in court. Likewise, employees should be aware of their rights and obligations to make informed decisions regarding their future employment prospects”
To discuss anything arising from this update, please contact Joanne Briscoe on 0121 710 5826 or via email: [email protected] or you can also contact other members of the Employment Team on 0121 233 4333 or email us at: [email protected]