Sir Martin Sorrell’s sudden exit from the WPP media empire he once led, and his swift setting up in competition with it, has received a lot of coverage and comment. Sir Martin apparently had no “non-compete agreement” when he left, and it is reported that he had previously traded it away in return for giving up his entitlement to an extensive notice period.
It is certainly unusual for a senior executive or other key employee not to be subject to post termination restrictions of one form or another as part of their terms of employment. Although restrictive covenants are notoriously difficult to get right – and there are lots of examples each year of employers who try to enforce them in the courts and fail– they can give vital protection to a business when an employee leaves. However, they must be used appropriately and drafted carefully.
In most cases where a court decides a restrictive covenant is unenforceable, it is because the relevant clause in the employee’s contract is badly worded or it tries to impose restrictions that aren’t necessary for that individual.
Restrictive covenants need to be tailored to the business and the employee concerned, otherwise they’re likely to be worthless.
Types of restrictive covenant
Although many people refer to restrictive covenants as “non-compete” provisions, they’re not permissible if they’re only intended to prevent competition. To be enforceable, post-termination restrictions have to protect one or more of the employer’s “legitimate business interests”, which normally means its trade secrets and other confidential information, its customer connections, or the stability of its workforce. Also, a covenant must go no further than is reasonably necessary to protect those interests – which means it’s unlikely to be enforceable if the duration of the restriction is too long or if a less onerous restriction would have sufficed.
The most common restrictive covenants are those which prohibit the misuse or disclosure of the employer’s trade secrets or confidential information,prevent the former employee from soliciting or dealing with particular clients or customers for a limited period, and prohibit the poaching of senior staff and other key employees who have remained with the business.
In the majority of cases, these types of restrictions will be sufficient to protect the employer. Anything more stringent will be unnecessary and therefore potentially unenforceable.However, in some situations the courts recognise that the only way the business can effectively protect its legitimate interests (and especially its trade secrets and other confidential information) is to stop the individual from working for a competitor for a short time, in which case a restriction of this type will be permitted. This could have the effect of shutting the individual out of their industry or their area of expertise for the duration of the restriction. It’s not just business leaders or senior managers who might have a restriction of this type as part of their employment terms – relatively junior members of staff can be bound by such a term if the nature of their work requires it.
In some countries,if an employer wants to hold a former employee to their restrictive covenants and prevent them from working for a competitor, it has to carry on paying the individual for the duration of the restriction. This isn’t a requirement of the law in the UK, unless the employee has negotiated such an entitlement as part of their contract – which would be very unusual.
Sometimes, the business wants an employee who has resigned or been given notice of dismissal to stay away from the workplace and/or stop carrying out their usual work until the employment comes to an end, although the employee is still entitled to be paid as normal. Putting an employee on “garden leave” in this way during their notice period – while ensuring the employee is also still paid as normal, as they are entitled to be –can be a very effective way of protecting the business. However, the employer might still want them to carry on working up to their leaving date for various reasons. It is therefore better for employers to have the option of using restrictive covenants alongside garden leave.
If an employer decides to place the employee on garden leave as provided for in their contract, the employer can still enforce their post termination restrictions, although the contract might stipulate that any time spent on garden leave has to be deducted from the length of the restrictions – so that if, for example, the employee has a restriction against soliciting clients for 9 months after leaving, and they were on garden leave for 3 months, the restriction will last for 6 months from the termination date. Not all contracts contain such set off provisions, and there is no hard and fast rule that they have to, but it’s good practice for employers to include one when putting new terms in place – otherwise a court might decide that the combined period of garden leave and the restrictions is too long, and say the restrictions are unenforceable as a result.
Breach of contract by the employer
The employer will not be able to enforce the departing employee’s restrictive covenants if it has committed a serious breach of the employee’s contract. An example of this is where the employer terminates the employment without notice and makes a payment in lieu when there is no contractual right to do so. Even though the employee has been paid everything they were owed for the notice period, the employer will be prevented from enforcing their post termination restrictions.
Rewriting bad restrictions
In some instances the court can remove parts of a restrictive covenant, where those parts would have prevented it from being enforceable. However there is limited scope for this, and the court can’t rewrite a restriction which was badly drafted in the first place. For example, if the court thinks a 12 month restriction against dealing with particular customers is unreasonable in a particular case, but it would have allowed the same restriction if it only lasted for 3 months, it can’t simply replace the 12 months with 3 months and enforce the restriction.
Negotiating restrictive covenants
Most employees who are asked to agree to restrictive covenants will find that they are part of their employer’s standard contractual terms for their role or the part of the business in which they work, and there may therefore be little scope for negotiation. However, it is worth seeking specialist advice both before agreeing to any restrictions at the start of the employment when some employees might have a lot of bargaining power, and also when discussing exit terms as the employer might be willing to relax the post-termination restrictions as part of a termination agreement.We don’t all have the bargaining power or clout Martin Sorrell had at WPP, but some well-informed negotiation on the way in or the way out could make things smoother all round.
David Fisher is a solicitor and partner in the employment and partnership law firm CM Murray LLP, and has over 20 years’ experience advising on restrictive covenant issues.