Post-termination restrictions: Getting the balance right
17 May 2019
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Post-termination restrictions (PTRs) can serve to restrict competition from an employee against the company after the employment relationship has ended. In order for a PTR to be lawful, it must seek to protect a legitimate business interest. For example, if a company has a skilled workforce, it would be legitimate for them to want to protect their staff from being poached or joining a competitor. However, the level that a company can restrict their staff is dependent on what is reasonable and it is likely to be unreasonable to restrict everyone.
A Managing Director will be privy to trade secrets, highly confidential information and will be directly connected to customers and suppliers. It is likely that the company will have a legitimate interest to protect by seeking to prevent this employee from leaving and immediately joining a competitor, taking all that knowledge with them. However, it would not be legitimate to prevent an unskilled factory worker, who does not possess customer connections or confidential information, from joining a competitor.
After identifying a legitimate interest, the restriction imposed on the employee must be reasonable. Most employers will be content with limiting competition to the areas in which that company operates, freeing the employee to work elsewhere. Conversely, a company which imposes a nationwide or global restriction, especially if the company is only regional, is likely to be unreasonable. Therefore, employers must ensure that the geographical restriction is not so wide as to make the restriction unenforceable.
A PTR is more likely to be seen as reasonable, provided that the employee is only bound for a limited period of time. However, determining the length of time of a restriction cannot be stated in general terms and will depend on the circumstances of each case. Therefore, you cannot assert that it would always be reasonable for a low level employee to be restricted for 3 months, a Manager for 6 months and a Managing Director for 12 months. Instead, you have to look at the employee and how their departure could impact on the business. For example, it may not be reasonable to restrict certain junior employees at all. However, a lower level programmer in a technology company may actually possess extensive knowledge about the company’s technological algorithms which, if replicated by a competitor, would damage the company. Also, a junior recruiter in a recruitment firm may have very extensive restrictions on dealing/solicitation of clients as this industry is monetised through making connections and contacts. Therefore, they would need to protect these to protect the business, whilst it would not be contemplated to place such a restriction on a similar level employee who labours in a factory.
Employers should be conscious of PTRs and look to use them when it is in their interests. But, those that look to bind all employees, as a standard, will often find that the majority of restrictions are unenforceable. A court will assess whether a less restrictive term would still have protected the business interest. If it is the case that a 3 month restriction would have been sufficient, but the employee has a 6 month restriction in their contract, then this is going to be considered unreasonable and thus unenforceable. Moreover, the court will not replace the 6 month restriction with a 3 month restriction. Instead, the whole clause will be void. Therefore, employers need to ensure that they are not being too onerous and pitch a restriction at the right level to protect the company.
When a company offers employment they should consider imposing PTRs on an employee but they should refrain from doing this in a standardised manner. Every time a new offer is made they should assess the individual to determine if restricting them post-termination would protect the company and, if it would, what level of restriction would be reasonable.
If you would like advice on Post-termination restrictions, please contact our employment team.
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