Restrictive covenants can be entered into employment contracts to limit the activities of employees when their employment ends. These can useful tools to protect trade secrets, confidential information and customers, particularly where senior or key staff are concerned. However, such covenants must be carefully drafted as they may constitute an impermissible restraint of trade and be held to be unenforceable.
Last month, the High Court considered such covenants in Bartholomews Agri Food v Thornton. This case is a useful illustration of the careful consideration that restrictive covenants require. Mr Thornton had been employed as a trainee agronomist in 1997 and was given a contract which included a clause providing that:
“Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company's customers, with a trade competitor within the Company's trading area...”
Mr Thornton worked for the company for 18 years and resigned in December 2015 to move to a new company. Bartholomews sought to enforce the above restrictive covenant in his contract. The Court held that, having been imposed on him as a trainee when he had no experience or customer base, the covenant was inappropriate and unenforceable, even though Mr Thornton had been promoted in his time with the Company to a role where such restrictions would potentially be appropriate. The High Court confirmed the position in previous cases that restrictive covenants must be appropriate and enforceable at the time they are entered into.
The restrictions were also found to be unreasonably wide in any event, as they sought to prevent Mr Thornton from dealing with any customer of the Company following the termination of his employment. On looking at the evidence, the Court found that the clients of Mr Thornton represented approximately 2% of the business turnover and it was therefore unreasonable to prevent him dealing with the other 98% with whom he had no direct contact.
There was also an unusual clause which provided that if a situation arose whereby Mr Thornton was in competition with the Company in the 6 months following termination of his employment, he would be paid by Bartholomews as long as he abided by the terms of the restrictions. They sought to argue that this made the terms of the covenant reasonable. However, the Court held that it is against public policy to allow employers to ‘buy’ a restraint of trade and this was not enforceable.
The decision in this case does not change the law but reaffirms the position that the reasonableness of restrictive covenants will be considered at the time they were entered into and against a general backdrop of their reasonableness. Employers should be cautious not to impose severe restrictions from the beginning of employment and should consider what, if any, restrictive covenants would be appropriate. If an employee is later to be promoted to a more senior role, or one which involves more contact with key customers, it is important for employers to revisit the necessity of restrictions at that time.
This case is also a reminder that restrictive covenants should be considered and drafted carefully. To be enforceable, the employer should be able to demonstrate that:
- there is legitimate business requiring protection; and
- the restrictions are no wider than reasonably necessary to provide that protection.
Therefore, in imposing restrictions, consideration should be given to what terms would be reasonable with reference to the actual customers and business dealings of the employee, what the employer considers to be confidential information, what information the employee has access to and so on.
It would prudent to ensure that contracts do not contain the same restrictions for all employees; particularly junior ones for whom they may be unnecessary. They should be tailored to the business and to the employee’s role and responsibilities, rather than being blanket restrictions which apply to everybody regardless of their role.
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Further general information regarding restrictive covenants can be found in our guide. For advice on this and other employment matters contact our Employment team.
