Our latest article in our breaking down the employment contract series provides a drafting checklist for post-termination restrictions to assist in drafting these potentially critical clauses so they are more likely to be upheld by the courts.
Well-drafted post termination restrictions can provide valuable protection to your business when a key employee leaves and has the ability to harm your business, for example through the use of confidential information, soliciting former colleagues or customers or competing with you.
Restrictions in employment contracts are much harder to enforce than those in commercial contracts and the starting point is that they are void as a restraint of trade. Keeping in mind the following issues will assist in drafting restrictions so that they are more likely to be upheld by a court and therefore more persuasive during any negotiation before potentially expensive court action is embarked on.
- Identify what you are trying to protect, how best to do so and check the restrictions are no wider than reasonably necessary to achieve that. For example, a non-compete restriction will be harder to enforce than a non-solicitation restriction and will not always be appropriate.
- Consider how long each restriction needs to last to provide the actual protection needed rather than adopting a one-size fits all approach. Restrictions lasting beyond 12 months after employment ends will be very difficult to enforce in any event.
- Geographical limitations on restrictions are less prevalent than in the past given the ability to compete anywhere in a digital age but can still be appropriate in certain circumstances.
- Restrictions are assessed at the time the contract is signed and what the parties reasonably contemplated at that time. Future proofing by imposing wide restrictions on a junior employee just in case they develop in seniority and status will generally weaken the enforceability of the restrictions because they will be wider than necessary to protect the legitimate interests of the business at the point the contract was signed.
- Template restrictions might act as a deterrent in some cases but are far less likely to be enforceable in litigation compared to appropriately tailored provisions for each employee.
- Close attention should be given to the definitions used as these will be critical to the interpretation and ultimate enforceability of the restrictions.
- The restrictions should generally allow the holding of a minority shareholding in another business.
- The restrictions should, where appropriate, be limited to aspects of the business the employee was recently involved with, for example, in the 12 months before termination of employment and/or the individuals they dealt with in relation to poaching co-workers.
- For restrictions introduced or varied during employment, adequate consideration (payment) will be required (with the exception of Scotland where this is not necessary).
- Keep restrictions under review as employees are promoted or become more valuable to your business and tailor them accordingly.
At the start of employment, parties naturally don't generally want to spend long contemplating what happens at the end of the relationship. However, taking the time to ensure post-termination restrictions are appropriately drafted can protect your business during any negotiation around exit terms, deter a prospective employer from employing the departing individual until the restrictions have elapsed and ultimately allow enforcement through court action should that prove necessary.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.