A wealth of case law has developed over the years concerning the enforceability of post-termination restrictive covenants in contracts of employment. The recent case of Bartholomews Agri Food v Thornton provides helpful guidance on how to assess the reasonableness of a restrictive covenant.
Restrictive Covenants In Employment Contracts
Background
There is an obvious danger that ex-employees will take advantage of confidential information, business plans, customer and client connections or other information about the company’s business upon the termination of their employment. In order to protect themselves and prevent this from occurring, employers often seek to insert restrictive covenants into an employee’s contract of employment.
A post-termination restrictive covenant will be void for being in restraint of trade and contrary to public policy, unless the employer can show that:
- It has a legitimate proprietary interest that it is appropriate to protect; and
- The protection sought is no more than reasonable having regard to the interests of the parties and the public interest.
Legitimate interests include an employer’s trade connections with customers or suppliers, confidential information and maintaining the stability of the workforce.
Difficulties often arise in relation to the second stage of the test. When assessing reasonableness, the court will have regard to the interests of the parties and the public interest. The question of reasonableness has to be considered at the point when the covenant was entered into, and not in light of subsequent events. Additionally, the restriction must be no wider than is necessary and afford ‘no more than adequate protection’ to the party in whose favour it is imposed. Both the duration and the extent of the covenant will be considered.
Facts of the case
Mr Thornton began working as a trainee agronomist for Bartholomews Agri Food in 1997, a company specialising in the growth and use of crops and plants. He signed a contract of employment containing the common terms and conditions for all employees.
Clause 10 of this contract placed the following restriction on employees:
“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”
As an incentive for complying with the restriction, Bartholomews stated that they would continue to pay employees their full pay for the duration of the restriction, even if they obtained alternative employment.
In December 2015 Mr Thornton resigned and in March 2016 he intended to take up employment with a new company, which was a retailer supplying customers with seed for agricultural purposes. Bartholomews applied for an interim injunction against Mr Thornton to prevent him from working for the competitor.
Decision
The High Court unanimously held that the restrictive covenant was unreasonable. Although Bartholomews had a legitimate business interest requiring protection (in particular, its customer connection and confidential information), the clause was in restraint of trade and therefore unenforceable.
In accordance with Pat Systems v Neilly [2012], the High Court ruled that a covenant that was unenforceable when first imposed will remain unenforceable, regardless of whether the employee is promoted at a later date to a role where it could be regarded as reasonable. When Mr Thornton first started as a trainee agronomist he had no experience or knowledge of the customer base, and therefore the non-compete restrictive covenant which prevented him from working with any of the employer’s existing customer base for 6 months after termination was inappropriate in light of his junior status. The covenant was therefore still unenforceable.
The High Court emphasised the importance of a restriction being no wider than necessary. Mr Thornton worked for the company for 20 years and had knowledge of the customer base; however the covenant in question prevented him from dealing with any customer, even those he had had no prior dealings with. The High Court held that this was manifestly unfair and wider than necessary to protect the company’s legitimate business interest, given that Mr Thornton worked with customers who represented only 2% of the company’s overall turnover.
The High Court found it irrelevant that the company had offered to pay the employees in full for the duration of the restriction. This follows the decision in JA Mont (UK) Ltd v Mills [1993] that it would be contrary to public policy to allow an employer to ‘purchase’ a restraint of trade.
Comment
The decision is a reminder to employers of the importance of taking care when drafting restrictive covenants so that the terms of the covenant are not too far-reaching or vague.
Whilst it may seem time consuming to seek legal advice on restrictive covenants that are applicable to the employee and business in question, doing so could prove invaluable in the event that enforcement proceedings are issued. Employers should consider using defined terms in restrictive covenants and be aware of the danger of a covenant being held to be unenforceable where it is drafted too widely.
For more employment law advice or to comment on this article, contact us to speak to a member of our employment law team.