Enforcing Restrictive Covenants
The recent decision in Planon Ltd v Gilligan  has highlighted the problems of enforcing restrictive covenants – an important strategy employers use to prevent a leaving employee from soliciting work in a similar field within a certain geographical area and for a certain length of time, firstly within the employment contract itself, or otherwise within a settlement agreement.
In an increasingly competitive economy, it is understandable that businesses want to retain employees, company information and clients and to protect their interest. However, if such clauses are poorly worded (as in the case referred to above) or too onerous, they can place unfair restrictions on employees; ultimately if a restrictive covenant is too wide ranging, or inappropriate, it will be unenforceable.
The question is how such clauses can be worded so as to be fair to both parties and (ultimately) enforceable in the courts?
Under UK law any contractual term which restricts an individual’s freedom to work for others or carry out their business is, prima facie void and unenforceable. A restrictive covenant must therefore go “no further than is reasonably necessary.” Of course, that is a subjective concept, and different industries or different sized businesses will have varying requirements. In an employment contract, a restrictive covenant may deter potential employees; in a settlement agreement it may prevent conclusion and prolong negotiation. The courts will ultimately decide whether the restrictions are reasonable for both parties, and whether they set a reasonable precedent. In particular they will consider whether the covenant is no wider than reasonably necessary for the protection of the employer’s legitimate interests (as established in TFS Derivatives v Morgan ).
There are three restrictions we should consider; timescale, geographical scope, and the seniority of the employee. Taking the last point first, a restrictive covenant should reflect seniority and the extent to which the employee’s departure poses a problem for the business. In this regard the case of Egon Zehnder Ltd v Tillman  is of interest. The defendant sought to argue that she should not be bound by a restrictive covenant in her original employment contract as she was taken on as a relatively junior employee, although she was later promoted to a more senior role. She lost her case as it was considered that both she and the employer were aware at the time she was taken on that she was to be prepared for greater things and rapidly promoted. Although she lost her case, it may be appropriate, where promotion occurs, to review a contract and introduce, or increase, restrictions. (A “non solicitation” clause, which is the least restrictive form of covenant, may be more appropriate for junior employees. It prevents them from approaching clients and can also include a non-dealing clause. It can be hard to police and to prove but offers a useful warning that the business will take such activities seriously).
As a rule of thumb a period of restriction is generally six months, but can be up to a year. Beyond twelve months’ a restriction is unlikely to be enforceable except in the most unusual circumstances, such as the sale and acquisition of a business. As regards geographical scope, this will generally be within the locality, perhaps county wide. The courts would most likely view a UK or global wide restriction as being automatically unfair, although as more businesses are no longer geographically specific location may no longer be fatal.
In the case of Planon Limited v Gilligan it was delay on the part of the employers themselves that ultimately led to the failure of enforcement. By the time the matter was heard at the Court of Appeal, the ex-employee had been in employment for seven months, and the Court took the view that enforceability was no longer relevant, and would cause an “unreasonable restraint of trade.”
Employers seeking to protect their business interests should ensure that restrictive covenants are reasonable and that, if enforcement is be required, action is taken without delay.
Our employment law solicitors can advise you regarding settlement agreements and employment contracts and give you focused advice on how to protect your business. Contact Zoe on 0203 858 9765 or email firstname.lastname@example.org. Mulberry’s has offices in Brighton and London.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.