Post-employment restrictions (also known as ‘restrictive covenants’) are contractual clauses prohibiting employees from doing something after their employment ends, such as taking clients with them to a competitor.
In the USA, permissible post-employment restrictions are typically governed by state law (statutory and common law) and can vary significantly from state to state. For example, in California, employee and customer non-solicitation restrictions are generally prohibited.
In Canada, post-employment restrictions can typically be difficult to enforce; for example, in Quebec, employers cannot rely on restrictive covenants when an employee has been terminated without cause.
This article highlights some of the similarities and differences between the UK, the US and Canada, and highlights some of the key considerations for protecting legitimate business interests in the UK.
In the UK, the following restrictions are permissible:
Non-solicitation - solicitation in this context usually refers to an ex-employee's positive act of contacting a customer or client of their former employer or making an initial approach, with a view to obtaining their business.
Non-dealing – this can cover not only enticement or interference with clients, where active steps are taken by the ex-employee, but also the provision of services, where no active steps are required by the ex-employee; the client could approach the ex-employee.
Non-poaching and non-employment – to prevent a former senior employee from soliciting other employees to protect the employer's legitimate interest in the stability of its workforce/remaining team. Enforcement is generally permissible in the UK, which is similar to many states in the USA, with the notable exception of California.
Non-competition - or ‘non-compete’ restriction, which prevents an employee joining a rival employer for a defined period after termination, has traditionally been harder to enforce in English courts than a non-solicitation restriction.
This is not unusual, as for instance in Ontario, employers are prohibited from entering into any agreement with an employee containing a non-competition clause, with limited exceptions for senior-level executives and in the context of a sale of a business. Generally, in Canada, non-competes will not be enforceable for employees that do not hold senior positions and not where a non-solicitation restriction would be sufficient.
In the USA, where non-competes are permitted in certain states, restrictions lasting from six months to one year are typically considered reasonable, but restrictions lasting more than two years are deemed unreasonable, except in connection with the sale of a business.
In the UK, non-compete restrictions are frequently used in employment agreements, especially for senior employees, and are frequently upheld.
A top tip when agreeing a non-competition restriction for a senior-level executive in the UK is that it is common practice to exclude any minor shareholdings, typically up to 5%, held by the employee in a competing business, as many clauses would otherwise prohibit the employee from holding a single share in a competitor's business. This could make the clause unreasonably wide and consequently unenforceable.
Geographical – in the UK these restrictions prevent an employee from carrying out activities in a specified area, usually defined as a radius around the former employer's physical premises. Generally, the larger the restricted area, the more difficult it will be to justify the covenant, as will their use when the employee operates remotely.
Post-employment restrictions will be unenforceable in the UK as an unlawful restraint of trade unless they go no further than necessary to protect the employer’s legitimate business interests. For instance, restrictions that have the sole aim of preventing competition will never be upheld by a UK court and will not be worth the effort.
That said, if the employer can a) demonstrate that it has a legitimate proprietary interest that it is appropriate to protect, and b) the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest, then the employer can enforce post-employment restrictions, which are typically set out in an employment agreement or director service agreement.
In the UK, garden leave is common for senior employees. It is notable that garden leave is becoming more common in Canada.
In the UK, legitimate interests include an employer's trade connections with customers or suppliers, confidential information, and maintaining the stability of the workforce. These interests are common in the USA and Canada too.
In the UK, with the exception of restrictions on using or disclosing employer confidential information, all of the restrictions listed above should be for a limited time. Typically, this ranges from three months to up to 12 months. When deciding the appropriate period, relevant factors may include:
Another top tip is that it is common in the UK to see express wording reducing the duration of all restrictive covenants by any time already spent on garden leave. This can make the restriction more likely to be held to be reasonable by an English court in terms of its duration.
A frequent practice in UK post-employment restrictions cases is that the ex-employee offers undertakings to observe the contractual restrictions in advance of a speedy trial of the action, which can often be listed within a small matter of weeks. Employers often rely on this approach to secure short-term protection; in many cases the matter will settle before the trial takes place as the litigation costs can be expensive.
If a court hearing becomes necessary, then the most common form of injunction sought in the UK is a prohibitory injunction – that is, an order which requires an ex-employee not to do something, such as a springboard injunction, which is designed to cancel out an unlawful advantage or head start that an ex-employee has gained through misuse of the employer's confidential information. The court will generally grant an injunction only if the employer could not be adequately compensated by financial damages.
Potentially. It is common for UK based employees of multinational companies to be asked to agree to restrictions subject to foreign governing law (often the law of one of the business friendly states of the USA, such as Delaware). It is also common for a share incentive plan or cash bonus award to be subject to a foreign governing law; however, any post-employment restrictions contained therein will not be enforced by the English courts if those restrictions are not enforceable under English law.
If you need assistance with UK post-employment restrictions or for any further information on enforceability in the UK, please do not hesitate to contact us.