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POST TERMINATION RESTRICTIONS – Protecting your business

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By Patrick Stewart

Contracts of Employment frequently include post termination restrictions designed to prevent an ex-employee from soliciting business, dealing with clients, poaching staff or operating a competing business.  This quite often raises the issue as to how effective they are.  Post termination restrictions in the employment context will only be enforceable by the Courts if they pass the following tests:

  • The Employer has an interest to protect.  This is often trading relationships, a stable workforce or confidential information.  It is, however, important to be clear what the interest is and generally sensible to refer to it in the restriction itself.
  • That the restriction goes no further than is reasonably necessary to protect the interests referred to in 1, above.
  • That the restriction is reasonable in all the circumstances.

The tests are applied by reference to the circumstances at the time when the restriction was entered into and not at the time when an alleged breach occurs. If an employee started employment as a junior member of staff and had restrictions imposed in his contract of employment which were unreasonable for such a junior employee, the fact that he has been promoted to a senior role where such restrictions would be reasonable is irrelevant. At the time he entered into the restrictions, they were unreasonable and therefore they will not be enforceable. The solution is to review restrictions as employees’ progress through promotion.

Problems with enforcing these restrictions arise if the period of the restriction is too long, or the ex-employee could inadvertently breach the restrictions. Note that if the restriction fails any of the tests, the Judge will not alter it to enable it to pass. It just fails. If a restriction lasting two years is held to be too long and therefore unreasonable, a Judge will not allow it to be enforced but only for a shorter, reasonable period. The clause will be ineffective as a whole.

The Government are looking at the question as to whether restrictions such as these stifle entrepreneurship. They are seeking the views of businesses and individuals on this subject and you can make them aware of your own views at the Innovation Power website held by the Department of Innovation and Skills.

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