Why restrictive covenants must be fit for purpose

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For employers, the turn of the year is a double-edged sword: it's the best time to find new hires, but it's also an organisation’s most vulnerable time of the year for losing key staff.

On such occasions, post-termination restrictions are an important tool in an employer's toolkit for protecting confidential information, trade connections and the stability of their workforce. However, the law on the enforceability of employment-related restrictive covenants is a minefield, and there have been a flurry of employee competition cases recently in the High Court, some of which have muddied the waters.

In Decorus Ltd v Penfold and Procure Store Ltd [2016], the court considered what constitutes an adequate ‘consideration’ (payment or benefit necessary to form a contract) for a new post-termination restriction. The employee, Daniel Penfold, signed a contract with relatively onerous non-compete and non-solicitation clauses on joining the company, which were likely to have been unenforceable (as restraints of trade). A year later, he signed a new contract, in which the lifetime of these clauses was reduced from nine to six months. But had there been adequate payment for this change?

The facts here were similar to those in another case, Re-Use Collections v Sendall [2014]. In both cases, there was a gap of three weeks between the employee signing the new contract and receiving a pay rise. In Sendall, the judge held it had not been made clear to the employee that the pay increase depended on him accepting the new contract, so the restrictions were unenforceable. In Decorus, the restrictions were held to be valid (although the decision is not binding). Perhaps the difference was that in the 2014 case, the new contract introduced new restrictions, whereas in the later case, the variation only amended an existing restriction.

It's worth noting that, paradoxically, a variation that introduces what appears to be a less onerous restriction may actually be more onerous for the employee, because it is more likely to be enforceable.

Whether a restriction is enforceable or not will be judged at the time a contract is made, not when that restriction is enforced. In Pickwell and Nicholls v Pro Cam [2016], two trainee agronomists moving to a competitor claimed their non-solicit and non-dealing restrictions were unenforceable, as they were drafted too widely, given the junior nature of the roles. The trainees were expected to acquire knowledge and develop skills, and were exposed to confidential and commercially sensitive information during their training. Even though the restrictions were drafted widely, the court held they were enforceable. Both the employer and the trainees knew the training period was just an initial phase at the time the contract was signed and that the trainees would become fully qualified in the near future. It was, therefore, reasonable for the parties to make provision for the future when the contract was made.

This decision contrasts with the result in Bartholomews Agri Food v Thornton [2016], which involved a non-compete clause imposed on a trainee agronomist, preventing him from competing with any of the company's customers, even though he only dealt with a fraction of them. This was held to be unenforceable, partly because the terms were inappropriate for such a junior employee at the time the contract was made, and partly because the drafting was far wider than necessary to protect the company's business interests.

These decisions emphasise the importance of ensuring restrictions are carefully drafted and tailored to individual circumstances. Employers need to identify what legitimate interest requires protection, and then ensure that the restriction is no wider than necessary to protect it. The key issues to consider are duration, scope and geographical extent. What might be appropriate for a senior employee, may be inappropriate for a junior one, so employers should consider updating restrictions when employees are promoted, and offer some form of payment for the change. Simply continuing to employ the employee is unlikely to be enough.