17 December 2012

Myth busting: post termination restrictions


Meriel Schindler
Partner | UK

 

There are several prevailing myths about post-termination restrictions. One myth is that post-termination restrictions do not work or are not worth the paper they are written on. This is not true. When properly and carefully drafted these restrictions can be very effective. Another myth is that the length of the restriction cannot extend beyond an employee's notice period. Again, this is wrong. Restrictions will be enforced if they are no longer than is reasonably necessary to protect the employer's legitimate interest. As a rule of thumb a restriction of longer than one year is unlikely to be upheld against an employee – a six-month restriction is more likely to be upheld. It is sensible to take advice as, when properly drafted, post-termination restrictions can be genuinely helpful to an employer dealing with the unexpected departure of one or more employees. The third myth, that a restriction cannot be enforced if the contract is not signed, is looked at elsewhere in this newsletter and in Louise Williamson's article about the case of Mr Lacy and his employer, FW Farnsworth Ltd.

 

The onus is always on the employer to show:

  1. they have a genuine proprietary interest to protect;
  2. the restraint is reasonable as between the parties; and
  3. the restraint is reasonable in the public interest.

The types of proprietary interest which employers are generally entitled to protect include their confidential information, their connections with clients, the stability of their workforce and their supply chain. The employer will need to identify these interests clearly and show that the restraint is reasonable, that is that it goes no further than is absolutely necessary to protect that interest. Usually, this is measured in weeks and months and not years. The drafting should be tightly tied to what the employee actually did and where they did it.

 

Timing is everything

 

One very important principle is that the enforceability of these restrictions is judged at the time that the restriction is imposed. This was reaffirmed in the recent of PAT Systems v Neilly in which the court struck down a 12-month restriction that PAT Systems had thought applied to one of their most senior and talented salesmen. This restriction had first been imposed on the employee when he was a junior account manager some 12 years previously and could not have been enforced against him at the time. Thus PAT Systems was powerless to prevent Mr Neilly joining a competitor when he left their employment in 2012.

 

Top tips for ensuring that your post termination restrictions are enforceable

  1. Think through clearly what it is you want to protect;
  2.  identify the shortest minimum time frame and narrowest geographic scope for effective protection;
  3. make sure the employee understands the restriction;
  4. make sure that the restriction is appropriate at the point the employee signs the contract;
  5. review and update restrictions as and when employees are promoted or change roles;
  6. consider making the promotion conditional on signing the new contract or offering new benefits as consideration for new restrictions; and
  7. although an employee might have accepted some new restrictions by conduct, do not leave this to chance as FW Farnsworth Ltd did. Make sure that employees sign new contracts when they are issued.
Meriel Schindler Partner | London

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