When are post-termination restriction clauses unreasonable?

Post-termination restriction clauses can be controversial as there are often doubts as to their enforceability. There is currently a public consultation on proposals to reform post-termination non-competition clauses, which might prevent them from being enforced to any degree in the future. We eagerly await the Government’s response to this consultation.

At present, post-termination restrictions are enforceable only to the extent that they are shown to be necessary to protect the employer’s legitimate business interests. Those business interests will often be linked to the relationships that employees have formed with key clients.

It is for the employer to show that the restrictions placed on the employee only go so far as what would be reasonably necessary to preserve the client relationship.

Post-termination restriction clauses

Can post-termination restrictions still be enforced after a short period of employment?

Say for example an employee resigns during the probation period and only has to give a week’s notice. This was the case in a recent High Court Case, Quilter Private Client Advisers Ltd – v – Falconer [2020] EWHC 3294 (QB).

What were the facts of the case?

Ms Falconer, a Financial Services Adviser, had appeared to quickly decide that her new role with Quilter was not right for her. She started looking for alternative employment even before her probationary period had ended.

However, her contract of employment contained a number of post-termination restrictions which sought to prevent her from joining a competitor for nine months or dealing with their clients for a year. Since her start date, 120 clients had been passed to her but she had only made contact with 40 of these before giving notice of her resignation, which only consisted of two weeks during her probation period. Quilter placed her on garden leave during those two weeks but later brought proceedings applying for an injunction to enforce the covenants.

What decision was made regarding the post-termination restriction clauses?

It was held that the covenants were unenforceable as it could not be proved that they would protect a legitimate business interest. It was taken into account that it takes time to build a relationship with a client and the fact that clients had been passed to Ms Falconer did not mean that a relationship had been created.

It was regarded as important that she was subject to the notice period, which also did not indicate that her departure would lead to a high-risk situation for the business. A shorter notice period usually reflected that an employee’s services were not that important or that it was a junior position. It was also relevant that more senior employees had the same or shorter covenants, which suggested that Ms Falconer had just been given a standard contract without consideration as to its suitability.

What conclusions can be drawn from the case?

The case highlights some potential problem areas regarding the enforceability of post-termination restriction clauses. During probationary periods, a shorter notice period will apply and that is a standard practice which is not likely to change.

Employers are faced with the difficulty of striking a balance between an effective restrictive covenant and one that is not unnecessarily onerous. When drafting such clauses, employers should consider the legitimate interest they are trying to protect, and whether the covenant does any more than is really necessary to protect that interest.

Employers should not apply a “one-size-fits-all” approach to covenants without considering whether or not it is actually suitable for the employee in question. They should also try to achieve a degree of proportionality between the seniority of their employees and the restrictions applied to them.

Employers might also want to think about providing for shorter and more limited covenants for the initial period of a new recruit’s employment, especially where the notice entitlement is reduced.

The courts, when assessing the reasonableness of a restriction, have to consider whether it is reasonable at the point in time when it is entered into and not when it is being enforced. In most cases, this is at the commencement of employment.  A restriction that is unreasonable and therefore invalid will not become valid as the employee advances in the organisation. It will therefore be important that new contracts with greater restrictions should be agreed upon as the employee progresses. As this case shows, a safe option may be when the employee completes the period of probation and is then subject to a longer notice period.

Feel free to contact us for any further advice you may need concerning post-termination restrictions or other employment law matters.

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