Companies urged to make competition clauses reasonable

30/07/2020

For businesses concerned about the impact of their key employees going to work for a competitor organisation, a non-compete clause can provide a safety net to stop commercially sensitive information being passed on to a rival. However, any post-termination restrictions must be reasonable if they are to stand up in court.

Here, Julia Fitzsimmons, Partner in our employment team, discusses why non-compete clauses should be carefully drafted to ensure they adequately protect the interests of the business but are not seen to be unfair to the employee or anti-competitive in nature. 

When an employee leaves a business to work for their competitor, there is of course a threat of commercially sensitive information being passed on to a rival. To protect against operational know-how and customer relationships being shared, restrictive covenants can be added into a worker’s contract of employment.

However, a recent case heard in the High Court has shown that while the court will enforce non-compete clauses, restrictions should not go further than protecting legitimate business interests. 

In Square Global Limited v. Leonard, a broker was contracted to give a six-month notice period, together with a restriction on working for a competitor for six months after the end of his employment. When he handed in his notice with immediate effect and left to work for a competitor, his former employer relied on the employment contract to stop him from going straight to a rival company. In response, the broker claimed he had been constructively dismissed, arguing this released him from his obligation to give notice and from the non-compete clause.

But the High Court upheld the employer’s argument and said that the six-month non-compete clause was reasonable and went no further than necessary to protect the employer’s legitimate business interests. 

The court also decided that the broker was required to serve out his six-month notice period on top of the six-month restriction, keeping him out of the market for a total of 12 months. The case also highlighted the importance of being clear about any so-called ‘garden leave’, where employees work out their notice period at home. 

Compare this verdict to a case from 2014, Ashcourt Rowan Financial Planning Limited v Hall, where the High Court held that a restrictive covenant designed to prevent a former employee from working for a competitor for six months was unenforceable. The court ruled that the covenant was too widely drawn, going beyond protecting the legitimate business interests of the employer and instead being in restraint of trade. 

The law has always regarded a covenant 'in restraint of trade' as being void, because it is anti-competitive and therefore against public policy, so it is only enforceable if it is strictly limited to what is necessary to protect a business.

If you are thinking of including an anti-compete clause and/or other restrictive covenant in an employment contract, ensure these demands are reasonable and focus on activities which would involve the employee directly competing with you as their former employer. Trying to do a ‘catch-all’ is impossible to enforce in law.

Any restrictions should be carefully drafted and checked at the outset, including those around garden leave and how or when that might be offset.

If you would like to discuss any Employment issues, please contact Julia using the details below.

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