UK: Restricting Employees´ Activities - How Far Can You Go?

Last Updated: 23 August 2007
Article by Joanna Blackburn and James Libson

This month we look at a recent case in which the Court of Appeal upheld a post-termination non-dealing clause in a contract of employment. We also consider the enforceability of restrictive covenants generally and whether the courts are beginning to take a more flexible approach to post-termination restrictions.

Court of Appeal upholds non-dealing clause

It is relatively rare for restrictive covenant cases to be heard by the higher courts (most are determined at the injunctive stage) and it is therefore interesting when one comes along as it gives an insight into the approach taken when assessing their enforceability. In the recent case of Beckett Investment Management Group Limited v Hall, the Court of Appeal was asked to determine whether a 12 month non-dealing with clients covenant was enforceable and, in particular, whether the employing holding company could enforce it despite the employee working for one of its subsidiaries (which was not party to the contract).

The High Court in this case held that the holding company did not have a legitimate business interest to protect, as it did not provide any services or have any clients. Therefore, it could not rely on the covenant. The Court of Appeal overturned the High Court decision holding that regard should be had to the realities of business and, in this case, the company structure was such that the holding company had a legitimate interest in protecting the business of its subsidiary. In addition, the High Court's construction would render the covenant meaningless and that could not have been the parties' intention when entering into the contract. This was especially so given that the employees were familiar with the group structure and the aim of the covenants.

The Court of Appeal then went on to consider whether the covenant preventing the employees from dealing with clients (of the subsidiary) for 12 months after the termination of their employment was reasonable in all the circumstances. Contrary to the High Court, the Court of Appeal held that 12 months was reasonable in this case given the seniority and importance of the employees concerned; the evidence about business patterns and the logistics of replacing them; together with unchallenged evidence of a 12 month industry standard.

Restrictive covenants – when are they enforceable?

The Beckett case is one of a number of recent cases where the courts have upheld restrictive covenants in favour of the employer. However, it is too early to say whether this is part of a general trend towards a more flexible view of post-termination restrictions. The fact remains that restrictive covenants are prima facie void for being a restraint of trade and contrary to public policy, unless an employer can show that it has a legitimate business interest to protect and that the restrictions are no wider than is reasonable in all the circumstances to protect that interest. This means that in order for a restrictive covenant to stand a chance of being upheld by the courts, it needs to be very carefully drafted and needs to take into account both the nature of the employer's business and the particular employee's role and status within it.

There are only three types of interests that an employer may be entitled to protect. These are:

(i) trade connections (with customers, suppliers or other key business contacts)

(ii) trade secrets and other confidential information

(iii) the stability of its workforce.

However, even if the employer can show that the relevant restrictive covenants are designed to protect the above interests, it would still have to show that the covenants are reasonable both in scope, duration and (where relevant) geographical area. There are no guidelines as to what is considered to be a reasonable period of a covenant as this will depend on the circumstances of each case and the employer being able to justify a particular period. However, covenants for more than 12 months are very unlikely to be enforceable and the shorter the period the better the chance of them being upheld. What is reasonable will normally be judged at the time the restrictions are entered into and it is therefore essential that these are properly drafted from the outset. Thought should also be given as to whether the employee in question will work for any group companies. Despite the encouraging decision in Beckett reported above, the only way to be sure that the interests of group companies are fully protected is to require the employee to enter into separate covenants with such companies.

The most common forms of covenants are non-solicitation of customers, non-dealing with customers, non-poaching of employees and non-compete covenants. The latter is normally the most draconian and therefore also the most difficult to enforce. Having said that, well drafted and properly considered non-compete covenants have been upheld by the courts in a number of cases.

Repeal of dispute resolution procedures

Gordon Brown has announced the "Employment Simplification Bill" as part of the Government's draft legislative programme. This Bill will implement the outcome of the Gibbons review of workplace dispute resolution, which we reported on in our April Briefing this year. As you may recall, the Gibbons review recommended the repeal of the statutory dispute resolution procedures and the implementation of a package of replacement measures to encourage early/informal resolution as well as changes to the tribunal system. The detail remains to be seen, but the announcement of the Bill is confirmation that the Government will take the recommendations on board and that we will see some significant changes in the area of workplace dispute resolution. It can't come soon enough!

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

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