Restrictive Covenants: when are they enforceable?

Employers will often want to impose limitations on an employee’s activities after the termination of their contract. Any term that attempts to do so risks being in restraint of trade, unless the employer can show that:

• It has a legitimate proprietary interest that it is appropriate to protect; and
• The protection sought is no more than is reasonable having regard to the interests of the     parties and the public interest.

How far can an employer go to protect their business interests when an employee moves job? What timeframe should the court consider when deciding whether a clause is enforceable? Can an employer buy a period of restraint post-termination? The recent case of Bartholomews Agri Food Limited v Michael Thornton provides some helpful, if not cautionary, guidance for employers.

Facts

Mr Thornton was employed as a trainee agronomist by Bartholomews Agri Food Limited, an agricultural products company, and had worked there since 1997, before his resignation on 21 December 2015. Upon leaving, he had intended to commence employment at another employer – Pro Cam UK Ltd – on the expiry of his notice period in March 2016.

There was a restrictive covenant in Mr Thornton’s contract which stated as follows:

“Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area, (which is West and East Sussex, Kent, Hampshire, Wiltshire and Dorset) or on their own account without prior approval from the Company. In this unlikely event, the employee’s full benefits will be paid during this period”.

Bartholomews therefore sought an interim injunction against Mr Thornton to prevent him taking on a new role on the expiry of his notice period. They had to persuade the Court that it had legitimate business interests requiring protection, and that the clause was no wider than was reasonably necessary to protect those interests.

The High Court agreed with Mr Thornton, who argued the restrictive covenant was in restraint of trade, unreasonable, and therefore unenforceable. It relied on the principle that a covenant which would have been unenforceable when it was first imposed (i.e. in 1997) given the status and role of the employee at the time, will remain unenforceable, irrespective of an employee’s change in role or responsibilities. In 1997, Mr Thornton had no experience and no customer base and thus, a clause preventing him from working with any of his employer’s existing customer base for 6 months was therefore inappropriate and constituted a restraint of trade.

Further, the covenant covered dealings with any of Bartholomew’s customers, regardless of whether Mr Thornton himself had worked with them. His customers (in 2015) represented just over 1% of the business’ entire turnover and therefore the Court deemed it unfair to prevent him working with customers representing the other 98%+ of turnover.

It is also worth noting that Mr Thornton’s contract provided that Bartholomews would continue to pay him throughout the period during which the restrictions applied. They argued that this made the restriction more reasonable but the Court held that it would be contrary to public policy to allow employers to “purchase” a restraint of trade in this manner.

Comments

This case serves as a reminder to employers to take particular caution when drafting restrictive covenants in an employee’s contract. They cannot be drafted on a ‘one size fits all’ basis. Rather, a number of factors need to be considered including, the type of role, their likely extent of contact with customers, and the extent to which their post-termination activities could impact upon the business. Employers should frequently conduct a review of all contracts to ensure they are relevant and remain up to date. When promoting or altering the roles of employees, employers should also consider what protection they need by way of restrictive covenants, and what legitimate business interests they are seeking to protect, to ensure the covenants remain enforceable. Any restrictions should be carefully drafted and tailored, both temporally and geographically, otherwise they may be deemed unenforceable.

Government call for evidence & consultation

On 24 April 2016, the government announced plans to look into employment rules that could be stifling British ‘entrepreneurship’ and ‘innovation’ by preventing employees from starting up their own business after leaving a job. In light of suggestions that such clauses can hinder start-ups and small businesses from hiring the brightest talent, the government has launched a call for evidence asking for views on ‘non-compete clauses’ like that in the case above. The consultation merely seeks to merely identify whether such clauses stifle ‘opportunities to innovate and grow’; it is unclear at this stage whether there will be any legislative ramifications.

If you would like to contribute to the call for evidence, you can find further information here. The consultation closes on 22 May 2016. Please contact a member of the Devonshires Employment Team if you have any further questions.

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