Introduction
This article provides an overview of how you can use garden leave and post termination restrictive covenants to protect your business when employees leave.
It will be useful reading for all employers.
Why impose restraints?
An employee must observe certain restrictions that are implied by the general law into a contract of employment. However, these covenants do not extend to the period after termination of the contract.
Employees may have knowledge of technology or strategic information about your business or customer contacts that they may try to use for the benefit of their new employer or business. So to use restrictive covenants is to safeguard your business.
We shall now discuss the different types of restrictive covenant, starting with garden leave and then how to enforce them.
Garden leave
Garden leave is the withdrawal of an employee from their duties by an employer. It usually occurs when employees hand in their notice in order to work for a competitor. While an employer may normally allow employees to leave immediately with pay in lieu of notice, in these circumstances it will wish to keep the employee from the competitor for as long as possible. It may therefore want to withdraw the employee from their regular duties and, typically, require them to stay at home whilst remaining an employee.
The aim of garden leave is to keep the employee out of the market place long enough for any information they have to go out of date, or to enable that employee's successor to establish themselves, particularly with customers, so as to protect goodwill. Operating garden leave may help deter a competitor from poaching employees in the first place.
The employee may seek to leave immediately without giving notice, even though this would be in breach of contract. If he wishes to enforce a garden leave clause, the employer should refuse to accept the termination of the contract, hold the employee to the obligation to give notice and suspend them for the duration of that notice period. The same applies if the employee seeks to resign with immediate effect claiming constructive dismissal.
Garden leave can also be used if the employer gives notice.
As the employment contract continues to subsist during any period of garden leave, you must continue to perform all of the terms of the contract. You must therefore, continue to pay salary and provide all other contractual benefits, such as medical and pension benefits and a company car.
Enforcement of garden leave
To enforce garden leave it is helpful to be able to rely on the following express contractual provisions:
- An express right for the employer to withdraw the employee's duties and not permit them onto the premises. This will prevent the employee from resigning and claiming constructive dismissal when the garden leave clause is implemented.
- An express restriction on other business activities during employment. This will draw to the employee's specific notice the nature of the restraint and allow an order enforcing the restraint to be more precisely framed.
Garden leave increases the bargaining position of the employer when confronted with a disaffected employee, and may be used in conjunction with restrictive covenants for maximum effect.
Post-termination restrictive covenants
A contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to public policy unless you can show that:
- You have a legitimate proprietary interest that it is appropriate to protect.
- The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.
You cannot impose a covenant merely to stop someone competing, but you can seek to stop that person using or damaging something which legitimately belongs to you.
There can be no guarantee that any restrictive covenant will be enforceable and there are no general guidelines as to what would be considered reasonable, for example in terms of time or geography. Each clause must be considered in each case by reference to the business needs of the employer imposing the restriction.
In broad terms, the courts permit two rights to be protected:
- Trade connections (with suppliers or customers) and, more generally, goodwill.
- Trade secrets and other confidential information.
Trade connections: an employer must be careful to distinguish its own customer connections from the personal qualities of the employee.
Trade secrets: it is uncertain how "confidential" a piece of information must be for it to constitute a proprietary interest that it is appropriate to protect. The courts have accepted that a secret manufacturing process is a legitimate business interest (depending on the precise circumstances). Price lists, sources of supply and customer lists are more contentious. If the information is generally known to the world at large, or if its disclosure to a third party is unlikely to be in any way damaging to the employer, it is very unlikely that it would form the basis for a protective restrictive covenant. If it is genuinely "secret" it may be sufficient.
An employer should distinguish between information and knowledge that the employee has acquired during the course of employment and information or knowledge that may be regarded as the employer's property. The courts will not prevent an employee from using experience and skill gained on the job.
If there is a legitimate interest to protect, you should only impose a restriction that is no wider than reasonably necessary to protect that interest. So be sure to limit the covenant not only by reference to the restricted activities themselves but also by reference to the period and (if appropriate) the geographical extent of its application. Failure to do so may result in the covenant being treated as having too wide a scope and being, therefore, potentially void.
Non-solicitation covenants
There is generally no implied restriction on soliciting a former employer's customers. An employee's personal influence over customers may be dealt with by a covenant preventing an employee from soliciting the customers of the employer. The covenant should be restricted to customers with whom the employee had contact during a specified period before termination. A sensible way to establish the length of this period may be the amount of time that it would take for the employee's successor to gain influence over the business contacts. A clause that sought to prevent a former employee from soliciting any actual or prospective customers of the company was held in Scotland not to be justifiable as necessary to protect the employer's legitimate interests.
It is now reasonably well accepted that preventing a former employee from soliciting other employees may protect a legitimate interest in the stability of the workforce. Accordingly, any clause that seeks to prohibit the poaching of employees will need to consider how long it will be before the influence over existing employees will be eliminated and replaced, and the scope of the classes of employees over whom such influence will exist.
Although the ability of employees to give notice and to leave the employer tends to reduce the effectiveness of this type of clause, attempts are sometimes made to protect employers further by including a "no muckers" clause, that is one which limits the freedom of an employee to join former colleagues.
Non-dealing covenants
A restriction on the solicitation of customers can be extended to cover not only enticement or interference (where active steps are required by the individual) but also the provision of services (where no active steps are required: the customer could approach the individual). This is known as a non-dealing covenant and has clear advantages as regards enforceability, because it avoids the need to prove that the individual made an approach, which is usually hard in practice. However, it does significantly broaden the prohibition, not only to affect the rights of the employee in question but also those of third parties, so a court is more likely to be cautious about enforcing it.
The enforceability of a non-dealing covenant will depend on the interest being protected. Similar considerations as for the enforcement of non-solicitation covenants will generally apply.
Enforcement may be more likely where the employer can establish a substantial personal connection between the employee and the relevant customers and where the business environment is such that overt solicitation is not necessary for the employer to be exposed to significant loss of business.
The non-dealing covenant will not be enforceable if it prevents any contact with the relevant business contacts. The restriction must be focused on contact with those business contacts that would affect the employer's business.
Since a non-dealing covenant moves some way towards representing a bar on any dealings with former customers, competitive or otherwise, a non-competition restriction may be desirable as well.
Non-competition covenants
A non-competition restriction is harder to enforce than a non-solicitation restriction, since it represents a greater infringement of the general principle that covenants in restraint of trade are illegal.
Employee are restricted as a matter of general law from disclosing confidential information amounting to a trade secret (for example, a manufacturing process) after termination and can be made subject to express confidentiality provisions. Any additional restrictive covenant may be viewed as unnecessary.
However, a non-competition restriction may be enforced in certain circumstances:
- It may not be possible to give the legitimate proprietary interest, for example a manufacturing process or confidential trade secret, sufficient protection through the implied and express confidentiality terms. For example, as was suggested in Printers and Finishers Ltd v Holloway [1965] 1 WLR 1, it might be inevitable that the employee will use such information in any future employment. A restriction against carrying out the activity is then more realistic, and easier to police.
- The individual's influence over customers or suppliers may be so great that the only effective protection is to ensure that they are not engaged in a competing business in any way.
As with non-solicitation covenants, the restriction must be for a limited time. When deciding the appropriate period it is necessary to consider how long will it be before competitive activities by the individual represent less than a material threat to the legitimate interest? How long will it be, for example, before the manufacturing process changes so much that the individual's knowledge of it is out of date?
The geographical extent of the limitation must also be considered. Worldwide covenants have been held to be enforceable A longer lasting restriction or one that covers a wider geographical area necessarily represents a greater restriction on trading and that will be taken into account. Relevant factors will include:
- Whether there is an actual relationship between the interest to be protected and any specific geographical area (Office Angels Ltd v Rainer-Thomas and O'Connor [1991] IRLR 214 CA).
- The area of activities of the employee.
- The size and nature of the population of the area.
Severability
The courts will not re-write a covenant to make it enforceable if it is too broad. Neither will a court construe a wide (and void) restriction as having implied (and valid) limitations; to do so would mean that employers would have no incentive to pay attention to the accurate drafting of restrictive covenants.
However, a court will seek to interpret a covenant in a way that gives effect to the intention of the parties. For example, a court will treat separate promises as severable: so if a clause contains what, in the court's view, are two separate promises, only one of which is unenforceable, it will uphold the enforceable promise and strike out the other.
The court, in deciding whether unlawful provisions may be severed from the rest of the terms, will consider:
- If the provisions can be removed without needing to add to or modify the existing wording (Sadler v Imperial Life Assurance Company of Canada Ltd [1988] IRLR 388).
- If the remaining terms are supported by adequate consideration (ditto).
- Whether the character of the contract is changed so that it becomes a different sort of contract (ditto).
- The need to be consistent with the underlying public policy of avoiding terms that are in restraint of trade (Marshall v NM Financial Management Ltd [1996] IRLR 20).
Implementing restrictive covenants and confidentiality provisions
Employees will be bound by the terms of any restrictive covenants or confidentiality provisions that are included in their contract at the start of employment (assuming that the relevant provisions are enforceable). However the situation is more complex when an employer seeks to impose restrictions during employment.
At common law, a contract may be amended only in accordance with its terms or with the agreement of all parties. Assuming the employer does not have a contractual right to impose a restrictive covenant during employment, there are three ways in which the employer may vary the contract:
- Seeking the employee's express agreement to the new terms (either on an individual basis or through a collective agreement which is binding on the employees concerned).
- Unilaterally imposing the change and relying on the employee's conduct to establish implied agreement to the change.
- Terminating the employee's employment and offering re-employment under the new terms.
In addition, the change must be supported by consideration. This will not be an issue if the change is to the employee's advantage and, where the change is to the employee's detriment, the courts and tribunals will often find consideration in the employee's continuation in the same employment. However it may be harder to establish consideration where the change to the employment contract will not take effect for some time (for example, rights and obligations on retirement or termination of employment). In such cases, it is likely to be more difficult for employers to rely on the concept of continued employment as consideration for the change and it may be appropriate to allot consideration to the change (for example, expressly tying the change into an annual pay rise).
Enforcing restrictive covenants
An employer seeking to enforce restrictive covenants is may take steps to obtain an interim injunction. Alternatively, or if it is not successful in obtaining an injunction, it may also seek damages from the employee for breach of the covenants. In deciding whether to award damages the court will consider:
- Whether the covenant was enforceable.
- If so, whether the employee had breached the covenant.
- If so, whether that breach had caused the employer loss.
- If so, how that loss should be assessed.
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