When an employee leaves an organisation, understandably the Employer will wish to protect its business interests, such as its relationship with customers and its position in the market. The Employer usually seeks to gain this protection through restrictive covenants in the Contract of Employment.
However, a contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to public policy unless the Employer can:
- identify a legitimate business interest that is capable of protection; and
- show that the covenant extends no further than is reasonably necessary to protect that interest.
The Court will enforce the covenant if these two criteria are satisfied.
In relation to the first requirement, the Courts generally recognise two kinds of interests of employers that can be protected by restrictive covenants. These are customer connections and trade secrets and other confidential information.
When considering whether the second requirement is satisfied, the Court will look at the scope of the restriction, i.e. the length of time for which it seeks to restrict the ex-employee and the geographical area it purports to cover.
A covenant which simply has the purpose of stopping an ex-employee from competing is unlikely to be found enforceable, but it can seek to stop them from using or damaging something that is owned by the business.
The employer must consider the nature of its business and the employee's position in the organisation. What would be seen as reasonable in restricting the Managing Director may not be seen as reasonable in restricting a Receptionist, for example.
There can be no guarantee that any restrictive covenant will be enforceable and there are no specific guidelines as to what would be found reasonable by the Courts, for example in terms of time or geography. Each clause must be considered in each case by looking at the needs of the Employer.
It is therefore important to take advice on the drafting of any post-termination restrictive covenant, to ensure that the business will be able to fully rely on its terms.