Restrictive Covenants – what should you be aware of?

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Jodie Hill – Solicitor

Restrictive covenants form a part of most employment contracts with a view to providing protection to an employer upon the termination of an employee’s employment.    In order for a covenant which restricts an employee’s activities post-termination of employment to be enforceable, the employer needs to show that it has a legitimate business interest to protect and that the protection sought by the company is reasonable.

In Bartholomews Argi Foods Ltd v Thornton, the High Court refused to enforce a post-termination restriction which would have prevented an employee from dealing with customers for six months even though the employer would have paid the employee during the period of the restriction.    One of the main points we need to be aware of from this case is that the reasonableness of a covenant is judged at the time it is entered into as well as proving that there is a legitimate business interest to protect and the protection sought is reasonable

Background of the case

Mr Thornton was employed by Bartholomews from 1997 as a trainee agronomist.  At the start of his employment Mr Thornton was provided with his contact of employment and entered into a 6 month post termination restrictive covenant which prevented him providing similar services to all of the company’s customers on behalf of a competing business within Bartholomews trading area.    The unusual part of the restrictive covenant was that the company would pay him in full during the period of the restriction even though his employment with the company would have ended.

When Mr Thornton resigned after a long career with the company and started working for a competitor Bartholomews sought an interim injunction to prevent him from dealing with its customers.

Decision of the High Court

The High Court refused the injunction application and ruled that the restriction in place was in restraint of trade and unenforceable.

The restriction that the employer sought to enter into was from 1997 when Mr Thornton was employed as a trainee but he had no experience and no customer contacts at that time.    The High Court clarified that a covenant will be judged at the time it was entered into and not at the point at which an employer seeks to rely upon it.  It was unenforceable in 1997 and therefore remained unenforceable regardless of whether an employee was subsequently promoted to a role where it could be regarded as reasonable (as per the Court’s decision in Pat Systems v Neilly[2012]).

Further, the Court found that the restrictive covenant was too widely drafted to be reasonable even after his long career with the company as it applied to all of the company’s customers.    The covenant sought to prevent Mr Thornton from dealing with any customer of the company regardless of whether he had any knowledge of them or if he had worked with them or not.   Mr Thornton actually only worked with customers who represented less than 2% of the company’s overall turnover and it was found to be manifestly unfair to prevent him from working with customers who represented the remaining 98%.

The unusual part of the restrictive covenant, whereby the company would continue to pay Mr Thornton during the six month period of the restrictive covenant, was found to be contrary to public policy to allow an employer to “purchase” a restraint of trade.

 

What does this mean for employers?

If you seek to rely upon restrictive covenants as part of an employee’s terms and conditions of employment then you need to ensure that they are drafted fairly and that the protection sought by the company is reasonable in order to protect the company’s legitimate business interests.

Some key points to take from the recent Bartholomews v Thornton case are as follows:-

  • Restrictive covenants should not be drafted too widely – remember to think of what is reasonable to protect the company’s legitimate business interests.

 

  • You need to ensure that restrictive covenants are tailored to an employee’s role at the time of employment and not put in place to cover any potential promotion in the future.   One point to note is that restrictive covenants are not normally enforceable for a junior member of staff.

 

  • Review restrictive covenants already in place to ensure that they do not impose an unreasonable restraint of trade – if so they would be deemed unenforceable.

 

  • If an employee’s role changes during the course of their employment you need to review their contract in full including the restrictive covenants in place – you may need to seek their agreement to amend the covenants at that time and it may be worthwhile to offer a real benefit to the employee in return for them agreeing to the new post termination restrictions.

If you require assistance in reviewing any restrictive covenants already in place, whether you are an employee or employer, we would be happy to assist.  Please contact the employment law department on 0113 245 0852 or at hello@milnerslaw.com if you have any queries.

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