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Easing post-termination blues

Published on Wednesday, 23 May 2012
Toby Brown

Post-termination restrictions (PTRs), which place limitations on what a former employee can do after leaving a company, are one of the most misunderstood areas of the law. Employers are often frustrated to find that what they have set down may not be enforceable. But such problems can be minimised by following few recommended steps.

If looking to enhance the enforceability of PTRs, the first priority is to understand the basic legal principles. Many employers take the view that because a member of staff has agreed to certain PTRs, it makes an open-and-shut case. Unfortunately for employers, the starting position is almost the opposite. Any restriction that purports to operate after the period of employment has ended and restricts the services that individuals can provide elsewhere is prima facie void. Such limitations are considered to be unlawful restraints of trade.

However, there are circumstances where someone would obtain an unfair advantage if free to leave their employer without any restrictions. To prevent this happening, PTRs can be enforced if the employer can show that the restriction imposed is necessary to protect legitimate interests. Also, the restriction imposed must be no wider than is reasonably necessary to protect those interests.

In this context, only three types of interest can be protected by PTRs. One is the continuity and stability of the employer’s workforce, or at least its key members. The second is the continuity and goodwill developed with clients, suppliers, and other parties that form part of the employer’s business. And the third relates to confidential information.

PTRs designed to prevent or limit competition will not be enforceable unless they are clearly linked to one of the above interests.

What will best protect the employer is a restriction on the departing worker joining a competitor. However, this should be appropriate, and attempts to impose such limitations can end up being too draconian. If an employer is trying to prevent a former sales manager stealing clients, then a non-solicitation clause, which prevents the individual approaching former clients, may provide adequate protection. Alternatively, there might only need to be a non-dealing clause, which would preclude offering services to a former client.

In fact, it could be said that a non-compete clause should only be used where the employee has highly confidential information. Then, the only realistic way to guard against possible abuse of the information is to prevent the employee joining a competitor.

Limited scope
When it comes to legal interpretations, PTRs are either enforceable or they are not. If they are wider in scope than necessary, the courts will not rewrite them for you. It is therefore essential that any restrictions are appropriately limited in scope, with due regard to several key considerations.

The first is geography. Essentially, a PTR should only apply to areas where the employee has influence, goodwill or area-relevant confidential information. For example, an employer cannot restrict a former employee from working in “Greater China” if the person’s previous role was limited to business in Hong Kong.

The second concerns actual contacts. Here, any PTR should be limited to clients and staff with whom the employee had recent dealings. In particular, those are clients with whom there would be current goodwill or about whom there is current confidential information. An employee cannot have any protectable goodwill with clients he has never dealt with.

A third centres on current relationships. It is difficult for an employer to restrict someone from approaching the company’s previous or target future clients. The employee may have no goodwill or current confidential information relating to these clients.

The fourth relates to time. The duration of a PTR should be no longer than necessary to protect the interest identified. For instance, if the employer is trying to protect confidential information, then consideration should be given to how long that information remains valuable to a competitor. In a fast-moving industry, the former employee’s knowledge or “inside information” may quickly become outdated. Or if the restriction is linked to goodwill, a point to consider is how long it would take for a new appointee to take over the relationship and develop similar rapport.

Best to customise
In any business, some staff have a great deal of influence over clients, others have virtually none. Despite this, employers often seek to impose the same PTRs on all employees. A “one size fits all” approach never makes sense. Something drafted as appropriate for senior staff will almost certainly be too wide and too long in duration if it is also used for more junior colleagues. Customising the restrictions will increase the likelihood that they are reasonable.

It is also advisable to consider how the PTR will operate if the individual involved is placed on “garden leave” – not working, but still receiving salary and not starting with a competitor. If the employee accepts this and, thereafter, is subject to PTRs, the length of time this person is “out of the market” may be extended longer than reasonably necessary. Therefore, many employers now reduce the length of the PTR. They give credit for the time spent on garden leave or let any other restrictions run from the date of resignation and concurrently with the notice period.

Nowadays, it is becoming increasingly common to pay a departing employee their base salary during any non-compete period that takes effect after termination. However, such payments do not guarantee the enforceability of PTRs because the public policy grounds against such restrictions still exist.

Behind this is the fact that employees paid during their non-compete period are far more likely to accept a restriction without seeking to challenge its enforceability. And courts are likely to take comfort from not condemning someone to being unpaid for a period of time if the restriction is enforced.

As a point of principle, the onus is on the employer to show that PTRs are enforceable. If any aspect is unclear, too complex, too wide in scope, or too long in duration, the intended restrictions will be unenforceable. Therefore, PTRs should be drafted or reviewed by experienced advisers who are familiar with the business and the industry.

Toby Brown is a partner at Kennedys, an international legal firm with expertise in litigation and dispute resolution

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