Post termination restrictions in employment contracts: Why have them and what to do when they are breached18 Jul, 2019 - Data and Privacy | by Grosvenor Law
Many employers have post termination restrictions in their employees’ contracts of employment in order to protect the company’s commercial and business interests when an employee resigns and leaves. This is particularly true in industries where there are trade secrets to protect, and more generally at management or executive levels, and in professional services.
The most common forms of post termination restrictions are ones that prevent the leaver from carrying out the following actions, for a specified period of time, after their employment comes to an end:
- Competing with the former employer;
- Using the former employer’s confidential information;
- Soliciting business from the former employer’s customers; and
- Soliciting the former employer’s staff.
Why are these post termination restrictions in the employment contract?
Put simply, the employer does not want his or her employee, once they have left, to compete and/or solicit and/or entice clients or staff to their new company. There is a balancing act to carry out, however, as an employer is not generally free to prevent this kind of condition without limitation – unless the provisions are carefully drafted they may well amount to an unlawful restraint of trade.
The restrictions (except for the use of confidential information), generally have time limits – commonly from a few months, and in exceptional cases to more than 12 months, and some will have other limits (for example contained to particular competitors or a specific geographic area).
The restriction must be tailored to the particular employee, taking account for example their level of seniority (at the date the restriction takes effect), what kind of client contact they have – ultimately what kind of damage they might do to the company if they are not restrained. Many employers forget to update the restrictions as an employee becomes more senior – what was a sufficient restriction for a junior employee is unlikely to feel satisfactory for the company CEO. Employers may also use boilerplate provisions, which they may find get thrown out in their entirety because they were too onerous for the employee when they started at the company.
Getting the terms of restrictive covenants right can take a lot of the headache out of addressing a breach when an employee leaves, and is very often worth a bit of time and investment..
What happens when an employee breaches the post termination restrictions?
Once the employer becomes aware of (or suspicious of) a breach, it must move quickly in order to limit the damage being carried out to the business. There may be practical steps to take, for example carrying out a review of the leaver’s computer in order to gather evidence. It may be helpful to engage solicitors to write to the former employee requesting that the leaver ‘undertakes’ or promises to abide by the restrictive covenants and for example, to :
- Cease and desist from carrying out breaches of their post termination restrictions. So that means either: stop competing, stop soliciting clients or stop enticing former colleagues to join the new company;
- Deliver up all of the former employer’s property;
- Deliver up all hard copy confidential information belonging to the former employee which is in their possession;
- Irretrievably destroy all soft copy confidential information belonging to the former employer (for example all information held on computers, laptops, hand held devices, servers / back-up servers);
- Sign undertakings that confirm: (1) all company property has been returned; (2) all soft copy documents have been irretrievably deleted; (3) the employee will not divulge the company’s confidential information to any third parties; and (4) the employee will adhere to the terms of the post termination restrictions in the employment contract.
Often, a firmly worded letter (and undertakings) will be sufficient reminder to the leaver of the risks of a breach, and they will sign the undertakings, return any property they have taken and agree not to breach their post termination restrictions.
It is often appropriate also to send a letter to the leaver’s new employer informing it of the leaver’s breaches and asking the new employer to give its own undertakings: (i) not to use any confidential information belonging to the old employer (and to return that information); and (ii) not to procure the leaver to breach the terms of their post termination restrictions.
However, there are some employees who will refuse to sign the undertakings and who will continue to breach, or at least not provide any assurance that they do not intend to commit further breaches. In those circumstances – provided there is some evidence of an ongoing intention to breach (which may in some cases be inferred from past behaviour) – the employer may well be within its rights to seek injunctive relief for the breach of the post termination restrictions.
If the former employer cannot stop the breaches and (having taken legal advice), has a good case for seeking injunctive relief, then it must make an application promptly. This would be in the form of an application notice supported by either a witness statement or an affidavit. The evidence in support should set out the following:
- Details of the post termination provisions in the contract;
- What provisions the employee has breached;
- Evidence supporting the breach; and
- Details or levels of the loss that suffered breach has or will cause.
There must also always be an underlying cause of action – the injunction is effectively holding the status quo until that substantive case, for example for damages for breach of contract – can be decided.
These applications are generally made “on-notice” and the leaver will have the opportunity to respond to the application (although occasionally a ‘without notice’ application is justified). If the court is satisfied that there are sufficient grounds to grant the injunction, then it will do so and any breaches of that court order by the leaver (or the new employer, if they are drawn into the injunction) could result in a fine or imprisonment.
Once the injunction has been granted, the court will sometimes order a speedy trial timetable so that the dispute can be resolved before the life of the post termination provisions expire. However, and in the main, most disputes are settled once the injunction has been awarded.
Whilst the need to enforce post termination restrictions may not come around very often, they can be vitally important when protecting a company’s business from leavers who may otherwise carry out serious and significant harm to that business, or signalling to other employees and rivals that breaches of restrictive covenants are taken seriously.
Ganesh Nanwani is a senior associate at Grosvenor Law, who often advises in relation to employment disputes.