Restrictive Covenants How events of 2020 changed our perceptions
Restrictive Covenants When advising employees about redundancy exits, it seems many employees are acting under the misconception that their contractual post-termination restrictions will not apply because their termination is by reason of redundancy. This is not correct, as the restrictions will apply even in redundancy terminations. It is worth noting, however, that the circumstances of 2020 may actually mean not all the restrictions are relevant even if they are still applicable. Victoria Brockley Partner victoria.brockley@laytons.com +44 (0)20 7842 8000
laytons.com | 2
Restrictive Covenants | How events of 2020 changed our perceptions
What are they? Post-termination restrictions are the contractual terms which place limits on what the employee is allowed to do following the termination of their employment. They are typically included in the employment contract and are negotiated as part of the employment package, either at the start of the employment relationship, or in the event of a significant pay rise and promotion.
Restrictions must be also be “reasonable”. Arguments about the reasonableness of what is imposed have to take into account both the interests of the parties and the public interest. The question of reasonableness is always considered at the point the covenant was entered into and not in light of subsequent events, which is why it is important that the restrictions are fully discussed and understood by the employee when they are presented and imposed. With the exception of the restraint on using or disclosing
What do they protect? The restrictions are to protect the employer’s “legitimate business interests”, which can include their confidential information, having a stable workforce, and their relationships with customers, suppliers and trade connections. An employer can seek to prevent the employee using or damaging something that legitimately belongs to them but it cannot impose a restriction just because it does not want the employee to compete.
confidential information, which is indefinite, the duration for which the restrictions are imposed post-termination must be for a limited period of time. This period is usually dependent on the employee’s seniority and remuneration package, and the actual role and duties of the employee in question. It is always my preference when advising employers to err on the side of caution regarding the length of the restrictions to avoid any debate (or litigation) about whether the length imposed is reasonable and therefore enforceable. Litigation about restraints of trade usually falls outside of the Employment Tribunal jurisdiction and is mainly dealt with in the Civil Courts, which have more stringent cost
What do they protect? Restrictions must be “no wider than necessary to be enforceable”. Put simply, the employer cannot stop the
consequences for the losing party than the Employment Tribunals, hence it is important for the employer to have tightly drafted restrictions and for the employee to be clear what it is to which they are agreeing to be bound.
employee from ever working again but it can put in place some time-limited stops on what they do in the months following their departure. This is to enable the employer to
Types of restrictions
regroup and act to protect itself and its legitimate business interests in this period, ready for when the employee starts
There are several types of restrictions which include non-
working again, usually for a competitor.
solicitation, non-poaching, non-employment, non-dealing, non-competition and geographical.
3
Restrictive Covenants | How events of 2020 changed our perceptions
Looking at 2020 and furlough In 2020, in response to Covid-19, millions have worked from home, particularly during the two lockdown periods, and an estimated 9.6 million jobs from 1.2 million different employers have been furloughed as part of the job retention scheme. Many who have been on furlough are now facing redundancy consultations and, if no suitable alternative employment roles are proposed, their employment will be terminated. It is on termination that the employees usually revisit their contract to remind themselves of their post-termination restrictions and to assess practically their position in light of their available opportunities for new employment.
new employer. Equally, in an example where the employer is making all staff in one site redundant, the employer would be hard pressed to argue that it had a legitimate interest or was reasonable in enforcing that particular geographical restriction on the employee. Restrictions relating to contact with the employer’s clients and customers, be they non-solicitation (whereby the employee cannot contact the customer to provide services) or non-dealing (whereby the employee cannot have any dealing with the customer even if they are approached by the customer) may also allow the employee some room for manoeuvre as the customers tend to be defined as those with whom the employee has had contact in the last six or twelve months. The definition will usually be drafted to say “Restricted Customer: any firm, company or person who, during the [PERIOD] months before the Termination
Although many employees believe it is unfair to have
was a customer or prospective customer of the Company
restrictions in the case of redundancy, and in a recession
with whom you had contact in the [PERIOD] before the
to boot, this belief is actually irrelevant and the restrictions
Termination”
will still apply regardless. However, reviewing the particular wording of the restrictions can sometimes provide some relief to employees in this current, and particularly strange, economic climate as not all the restrictions may be relevant when examined closely.
An Employee who has been on furlough for the last six months or more may find that they when review their particular definitions section of their restrictive covenants relating to “Restricted Customer” they do not have any restricted customers in scope because they have had no contact with customers for the period before the termination
Re-examining the details based on the events of 2020 Geographical restrictions can prevent employees carrying out activities in a specified area post termination, which is usually the radius around the employer’s premises. In a circumstance where a future role may be more likely to allow (or necessitate) home working, the geographical restriction to a former employer’s premises may not affect the employee and so there might actually be no breach of this restriction in taking on a new homeworking role for a
of their employment because, in that period, they were on furlough. Whether this applies or not will obviously depend on the particular wording of the definitions section in the individual’s contract but it is certainly worth carefully checking it in these circumstances. Indeed, employers may decide it is beneficial to exercise their discretion and to remove restrictions concerning nonpoaching and non-employment of staff for those who have already left so that more recently redundant employees can join them at their new employer. In such a case, not only will the newly redundant employee be happy in being able to walk straight into a new role, but the employer will have
4
Restrictive Covenants | How events of 2020 changed our perceptions
ensured that any financial loss on the part of the employee was minimal, thus extinguishing a potential claim for unfair dismissal, which is calculated on loss of earnings. This is an example where it pays for an employer to be commercially savvy and examine every angle of the actual situation they are faced with rather than stubbornly insisting on restrictions for restrictions’ sake, especially in the case of a junior employee whose departure will not cause them harm in any event.
employment situation in the last 12 months because potentially some of the restrictions may actually not be relevant, or, there may be an opportunity to negotiate with the employer to have them reduced or removed. Such variations will depend on the goodwill of the employer who will be keen to keep in mind the legitimate business interests they have to protect, but who may also be mindful, or more receptive, to considering their departing employee’s actual circumstances in the current climate.
Restrictive covenants in settlement agreements Of course, employers who are offering enhanced financial redundancy payments may seek to do so by way of settlement agreement in which the employee waives the right to sue in exchange for receiving the enhanced payment. Settlement agreements provide the employer with an opportunity to reinforce existing post termination restrictions or even introduce entirely new terms. Restrictions which are included in settlement agreements are heavily negotiated and are usually more tailored to the individual circumstances and so are more likely to be enforceable, especially as the employee will have received advice from their solicitor before entering into the new terms. Although employee’s eyes can often glaze over when discussing their post-termination restrictions because they believe they will not apply, this belief is wrongly held and the consequences for breaches of restrictive covenants can be costly. The validity of post-termination restrictions is not affected because the termination is by reason of redundancy. It is therefore important that each restriction is carefully considered by the employee in light of their actual
5
Restrictive Covenants | How events of 2020 changed our perceptions
Expertise
Employment Employment law has an impact on businesses and individuals alike. It is complex and mistakes can be costly and time-consuming. Our Employment team combines legal expertise with commercial acumen to provide our clients with practical solutions, not just information.
Rumana Bennett
Victoria Brockley
David Buckle
Solicitor rumana.bennett@laytons.com +44 (0)20 7842 8000
Partner victoria.brockley@laytons.com +44 (0)20 7842 8000
Partner david.buckle@laytons.com +44 (0)20 7842 8000
Ryan D'Souza
John Gavan
Dimitri Iesini
Solicitor-Advocate ryan.dsouza@laytons.com +44 (0)20 7842 8000
Partner john.gavan@laytons.com +44 (0)20 7842 8000
Partner dimitri.iesini@laytons.com +44 (0)20 7842 8081
Jennie Kreser
Nicholas Lakeland
Dilini Loku
Consultant jennie.kreser@laytons.com +44 (0)20 7842 8037
Partner nicholas.lakeland@laytons.com +44 (0)20 7842 8000
Associate Partner dilini.loku@laytons.com +44 (0)20 7842 8000
6
2 More London Riverside, London SE1 2AP +44 (0)20 7842 8000 | london@laytons.com laytons.com
Š Laytons LLP which is authorised and regulated by the Solicitors Regulation Authority (SRA Nº 566807). A list of members is available for inspection at the above offices.