The importance of well drafted contractual clauses (and why not to apply restrictive covenants to junior employees.)
A well drafted restrictive covenant can be a useful thing – many employers have relied on them to stop former employees taking their confidential information to a competitor or indeed to stop the employee joining the competitor at all for a lengthy period. But a badly drafted Clause is going to be worth the paper it’s written on, and a whole lot less if you actually try and enforce it.
When employee Thornton joined Bartholomews Agri Food Ltd in 1997 he may have been forgiven for not fully understanding the restrictive covenant written into his employment contract:
"Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company's customers, with a trade competitor within the Company's trading area, (which is West and East Sussex, Kent, Hampshire, Wiltshire and Dorset) or on their own account without prior approval from the Company. In this unlikely event, the employee's full benefits will be paid during this period."
In 1997 Thornton was a junior employee and he didn’t hold a customer facing role. To have tried to restrain him from working with a customer would have been a restraint of trade and therefore unreasonable. The Clause effectively banned him from working in his own trade in 6 counties around where he lived. But in December 2015 Thornton, now a much more senior and experienced employee, resigned to join another Company, said by Bartholomews to be a competitor.
Bartholomews requested that the High Court grant an injunction to stop Thornton from joining his new employer in breach of the Clause above. They argued that even if the Clause shouldn’t originally have applied to junior Thornton in 1997, his current seniority meant that it now should apply.
The High Court ruled though that a covenant which was unenforceable when it was first imposed would stay unenforceable even if the employee was later promoted to a role where the Clause could be regarded as reasonable. In the event it also decided that even if it had applied to the now senior Thornton, it would be still be too wide to be reasonable.
The Court observed how badly written the Clause was, and wondered what ‘of a similar nature’ meant. Looking at the reality of Thornton’s role, the Court saw that he worked with customers who were responsible for just over 1% of the Company’s turnover. To prevent him working (on behalf of his new employer) with the other 98%+ with whom he had little or no material dealings was simply unreasonable.
It made two further observations. Firstly it saw that Thornton’s employment contract contained no provisions for garden leave (and so Bartholomews’ attempt to enforce it may constitute a breach of contract); secondly that the last sentence of the Clause, which seemed to enable Bartholomews to ‘buy’ a restraint of trade, was also unfair.
Thornton was free to join his new employer from 22nd March, and we understand he did so.
So what can we learn from this case? Here are our top tips when it comes to drafting restrictive covenants:
- Get a decent HR company to draft the clause for you (we would say that wouldn’t we!)
- Do not blanket restrictive covenant clauses for all employees – consider each employee and restrict the Clauses to those who genuinely currently could represent a threat to the business if they left to join a competitor (or set up on their own)
- Make sure the Clause goes no further that it needs to do to genuinely protect business interests
- Where Clauses include a provision not to work with previous customers, ensure this is restricted to "such customers that the Employee has had material dealings in the last X months of their employment"
- Be clear about the activities you are trying to protect – here the Court criticised the description of ‘supplying goods or services of a similar nature’
If you might intend to use garden leave as a mechanism for preventing an employee working for you or any other restricted employer, review your employment contracts to check that they actually have a suitable clause.
And a further tip, not necessarily stemming from this case, would be to ensure that when seeking to restrict an employee from joining an existing competitor, try to name those competitors who would be most harmful to the Company if the employee joined them.
Lastly on the subject of restrictive covenants, if this article is enough to make you decide to update (or ask us to update) your restrictive covenants, and particularly if you intend to implement them for existing employees for the first time, it is important to offer something of value in exchange for that new Clause…if you don’t, it won’t be binding.
If you're thinking of outsourcing your HR why not contact myhrdept.co.uk. With packages for medium sized companies typically from only a few hundred per month (and from only £110 per month for smaller companies and start-ups) and fixed price HR support options available for one-off issues, we believe we offer the best combination of quality and price available in the UK. Call us on 01628 820515 to discuss your requirements or email us here and we’ll call you back.