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Restraint of Trade Clauses: Employer Advice

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A restraint of trade clause in an employment contract can be an effective way of restricting the post-termination activities of a key or senior employee, by helping to protect the employer’s legitimate business interests if that individual’s employment comes to an end.

However, not all restraint of trade clauses will be enforceable by the courts. Employers can risk being unable to rely on these contractual protections through overly-broad and careless drafting of clauses.

In this guide, we explain what restraint of trade clauses are, and when and how these can be used by employers to protect their business interests in the event of a dismissal or resignation. We also look at when these clauses may be classed as lawful, and when they are likely to be deemed unenforceable.

 

What is a restraint of trade clause?

A restraint of trade clause, also known as a restrictive covenant, is a clause which seeks to restrict an employee’s activities post-termination. It is essentially a contractual provision that continues to operate after employment has come to an end, typically for a finite period of time.

Restraint of trade clauses can seek to prevent employees from trading in a competing business or undertaking other specific activities for a specific period of time. A non-compete clause is where the employee agrees not to set up business in competition with their former employer or to work for a rival employer, usually for a specific period of time within a specified geographical area. A restraint of trade clause could also be a clause preventing a former employee from soliciting or dealing with clients of the employer, known as non-solicitation or non-dealing clauses; from poaching other members of staff, known as non-poaching clauses; or from passing on trade secrets or sensitive information to any new employer, known as confidentiality clauses.

 

When can restraint of trade clauses be used?

Restraint of trade clauses are usually introduced at the outset of the employment cycle, within an employee’s contract of employment, especially in the context of skilled and senior employees who are key to the overall success of a business. This can help to deter these individuals from competing against their former employer if they resign or their employment is otherwise terminated, either by setting up a similar business or by going to work for a direct competitor. Equally, this type of clause can be used to stop these individuals from taking with them other key employees, or valuable business through clients and suppliers.

To help protect an employer’s legitimate business interests, restraint of trade clauses can also be introduced, or reinforced, prior to employment coming to an end within the terms of any settlement agreement. Formerly known as compromise agreements, settlement agreements are legally binding documents between an employer and employee that are designed to settle any claims that arise out of the employment relationship, bringing that relationship to an end on mutually agreeable terms. This could be, for example, in the context of a redundancy scenario or where an employer is otherwise looking to lawfully terminate employment and reduce the risk of being exposed to a claim for unfair dismissal.

 

How can restraint of trade clauses be used?

Provided a restraint of trade clause is reasonable in scope and duration, and clear in its terms, this will provide an employer with a lawful basis upon which to take legal action against a former employee to prohibit any activities in breach of this clause. A breach of a restraint of trade clause will essentially constitute a breach of contract for which legal redress can formally be sought through the courts, for example, for injunctive relief to prevent the breach from continuing and/or damages to recover any financial losses flowing from that breach.

In the context of post-termination contractual breaches, an employer will often have less leverage to negotiate an acceptable outcome, and the employee less incentive to remedy any breach, than if the employment relationship was still continuing. Still, well-drafted restraint of trade clauses can be extremely effective in prohibiting the types of activities that could threaten an employer’s legitimate business interests. Equally, where the employee does engage in prohibited activities, the mere threat of court proceedings can often be sufficient to put a stop to this, before too much damage is done. For example, if an employee is planning to work for a competitor in breach of any non-compete clause, the threat of litigation will usually result in them deferring their start date for the duration of that restriction.

However, caution should always be exercised here, where a claim before the High Court for injunctive relief and/or damages can often present all kinds of evidential and legal hurdles, not least where the scope of any restraint of trade clause is brought under scrutiny. Given the potential expense and investment involved in bringing a claim for this type of employee breach of contract, expert advice from an employment law specialist should always be sought.

 

Are restraint of trade clauses lawful?

Restraint of trade clauses are not unlawful in principal, rather it is a question of interpretation, where the courts will judge each case on its facts. Under the common law doctrine of the restraint of trade in England and Wales, any restriction will only be deemed lawful if:

  • the former employer can show it has a legitimate business interest to protect, and
  • the restriction extends no further than is reasonably necessary to protect that interest.

This means that employers must not only be able to show a legitimate protectable interest — such as the stability of their workforce, their connections with clients and suppliers, or any trade secrets and confidential information — they must also be able to satisfy the court that the restraint does not exceed what is reasonably necessary to achieve the protection sought.

In determining whether to enforce a restraint of trade clause, the courts will take account of the public interest that there be minimum restriction upon a person’s right to work, as against the employers entitlement to reasonable protection of their legitimate business interests. The court will also have regard to factors such as the scope and length of the restriction, as well as the nature of the business and the employee’s role within the organisation.

Historically, the courts have adopted a strict approach in relation to the enforceability of restraint of trade clauses, where limited scope has been given both as to what constitutes a legitimate business interest and what is reasonably necessary to protect such an interest. More recently, however, there has been a noticeable trend towards enforcement of these clauses, driven in part by cases coming before the courts involving more senior and sophisticated employees with strong bargaining power during employment negotiations. This is because key and high-ranking employees can potentially cause significant damage to the legitimate interests of a former employer, and are also often able to negotiate with their employers on nearly an equal footing when they enter into any post-employment covenants.

 

When are restraint of trade clauses not enforceable?

To be legally enforceable, an employer will not only need to show that the restraint of trade clause is needed to protect a legitimate business interest, but that the protection sought is reasonable and proportionate; ie; no more than is necessary to protect that interest. This means that if the restrictions contained within the restraint of trade clause are too wide, these could be found to be in unreasonable restraint of trade. The Supreme Court decision in Tillman v Egon Zehnder Ltd [2019] UKSC 32 serves as a stark reminder of the dangers of widely-drafted clauses, despite the fact that the employer was ultimately successful.

On its facts, Ms Tillman, a former senior executive, was employed by Egon Zehnder, a global executive recruitment consultancy. Even though Ms Tillman had been promoted several times, she remained employed largely on the terms of her original contract. This contract contained a non-compete clause preventing her from being “concerned or interested in any business carried on in competition” with Egon Zehnder’s business for a period of 6 months post-termination. When Ms Tillman indicated that she intended to start work for a competitor firm, her former employer sought immediate injunctive relief to prevent her from doing so.

At first instance, injunctive relief was granted by the High Court, although the Court of Appeal allowed Ms Tillman’s appeal, accepting that the clause was in unreasonable restraint of trade. In particular, it was said that the phrase “interested in” theoretically restricted Ms Tillman from purchasing even a minor shareholding in any competing company, and was therefore wider than was reasonably required for the protection of the employer’s legitimate business interests. In unanimously allowing the appeal, the Supreme Court found that these words could be removed, or severed, so as to render the remainder of the clause enforceable.

However, given that the contractual period of restraint had long since expired, the decision to formally restore the High Court injunction represented something of a pyrrhic victory for Egon Zehnder — a scenario that could so easily have been avoided had the restraint of trade clause been drafted more narrowly in the first place. Equally, employers should not now become complacent when introducing restraint of trade clauses, expecting the courts to enforce any reasonable part and sever any offending part. This means that post-termination restrictions must be carefully tailored to the specific employment scenario from the outset.

 

How should restraint of trade clauses be drafted?

There is no right or wrong answer when it comes to drafting restraint of trade clauses, as every scenario is fact-specific. This means that it will all depend on the post-termination activities that the employer is looking to restrict and the nature of the interest it is seeking to protect, as well as the nature of the business and the employee’s role within it.

However, any clause seeking to restrict the activities of an individual once their employment comes to an end must not be wider than that reasonably required for the protection of the employer’s legitimate business interests. This means that care must be taken at all times to avoid any unreasonable post-termination restrictions and to avoid using broad terminology.

For example, a non-compete clause restricting an employee from ‘undertaking any work in competition with parts of the former employer’s business in which the employee had been involved to a material extent in the 12 months prior to termination’ is likely to be enforceable. In contrast, a non-compete clause seeking to restrain any competition in relation to ‘all parts’ of the employer’s business, and not just those with which the employee was materially engaged before their employment ended, would almost certainly be deemed unenforceable.

In the recent decision in Law By Design Ltd v Ali [2022] EWHC 426 (QB), the High Court held that a non-compete clause in a service agreement, that applied across the North West of England for a period of 12 months after termination of employment, legitimately prevented Ms Ali, an experienced lawyer, from joining a direct competitor. It also held, that a wider restriction contained in a separate shareholder agreement, which prohibited Ms Ali from competing with any other part of LBD’s business, was unenforceable and void.

In most cases, unless the employer is adopting a tried and tested restraint of trade clause in the specific context of their business, to ensure that any restriction is not impermissibly wide, expert advice from an employment law specialist should always be sought. Seeking expert advice can also ensure that employers do not fall foul of the statutory rules relating to the validity and enforceability of any settlement agreement that may be used before employment is terminated to incorporate or reinforce any restraint of trade clauses.

Where a restraint of trade clause has been included for the first time within the terms of any settlement agreement, or this agreement is being used to bolster any existing provisions within the contract of employment, employers must ensure that they comply with the relevant statutory requirements. This is because there are various struct rules that must be followed to ensure that a settlement agreement is legally valid and enforceable, including the fact that the agreement must be in writing and the employee must have received advice from a relevant independent adviser on the terms and effects of the proposed agreement.

 

Need assistance?

DavidsonMorris’s employment law specialists support employers with all aspects of workforce management. We provide guidance on areas such as effective drafting of employment contracts and documents, and support with employee exits and settlement agreements. Though our fixed fee employment law service, Triple A, you can gain unlimited access to our employment law expertise for a fixed monthly fee. For advice on a specific issue, or for more information about Triple A, contact us.

 

 

Restraint of trade FAQs

Is a restraint of trade clause legally enforceable?

A restraint of trade clause will be legally enforceable, as long as the former employer can show it has a legitimate protectable interest and the terms of the clause extend no further than is reasonably necessary to protect that interest.

How long is a restraint of trade valid for in UK?

A restraint of trade clause will usually restrict an employee from starting a business in direct competition or working for a rival employer for a period of 6 months, although this could be up to 12 months for senior employees

How do I get around restraint of trade?

If an employee is subject to a restraint of trade clause post-termination, they should always seek professional legal advice. In some cases, the scope or duration of the clause may be considered too wide to be deemed enforceable.

Last updated: 6 July 2022

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