Contractual restrictions on competition after leaving employment- are they enforceable?

A common clause found in contracts of employment is one to the effect that the individual is prevented from working in competition with the business for some time after leaving their employment. However, the difficult issue for individuals and businesses is the question of whether or not such terms can be enforced.

In our experience it is certainly true that many businesses incorporate clauses in their staff contracts that seek to prevent future competition knowing or believing that the restriction will not or cannot be enforced. In those instances the clauses exist really as a deterrent against such conduct, rather than in the real hope of being enforced. However, in certain circumstances the law will enable a business to limit competitive conduct from a former employee. There area number of aspects to the way in which the courts will decide if such restrictions can be enforced.

A recent decision of the High Court illustrates a number of areas in which businesses can find themselves in difficulties in trying to enforce post-termination restrictions on competition by a former employee. The case, Bartholomews Agri Food v Thornton considered a number of issues relevant in such cases.

In 1997, the individual commenced work for the company as a trainee. At that time he had no experience or individual customer base. Despite those facts he was presented with, and signed, a contract of employment which included terms which prevented him from working for any of the company's existing customer base for a period of 6 months after leaving employment. The individual resigned from the company in December 2015, with the resignation taking effect in March 2016. By that time he had become a valuable employee, with many customers relying on his work, and the vast majority of the company's customers were based in the individual's area. So by that time, the company believed that the loss of the individual to work in competition would be very damaging to their own business.

As normal, simply confirming many previous cases, the court stated that in order to enforce the restriction in the contract the company must show that it has a legitimate business interest requiring protection, and that the protection in the contract went no further than was necessary to protect those legitimate interests. At this point the court examined if the clauses in question were enforceable at the time they were first agreed (ie back in 1997 when the individual was a trainee!). The court concluded that the terms were unenforceable when first agreed, and moving on the court held that the terms remained unenforceable regardless of whether the individual was subsequently promoted when it might otherwise be regarded as a reasonable restriction. Looking back at 1997 the individual had no customer base and no experience. Therefore the post-termination restriction was unreasonable and unenforceable as it purported to prevent him from working with any of the company's existing customers. The court noted that the restriction was also unenforceable as it prevented the individual from working for any customer, whether or not he had any experience of doing work for the customer in question. The company sought to convince the court that the contractual restrictions were reasonable as the contract provided for the individual to be paid while under the period of restriction. The court rejected this argument.

The case highlights a number of points. Firstly businesses should ensure that the contracts of employment they use are properly tailored to the employees in question and any restriction is appropriately linked to the work that the individual actually does for the business. It also highlights the fact that employers should review the contracts they have with their staff, particularly when staff are promoted, or assigned new tasks and roles.

At Hallett Employment Law Services Ltd we can advice you as a company on the right terms to include in contracts for specific staff, and so limit the risk that may be faced in the future from competition, or damaging conduct by an employee.