Picture the scene ... first thing on Monday morning, your top Sales Manager tells you she has been offered a new job and hands in her notice.
Your first thought - can I persuade her to stay? Your second thought – is she going to a competitor and can I stop her?
You can't stop her from leaving, provided she is complying with her contractual notice period. You may be able to restrict what she does next, if you included appropriate post-termination restrictions in her contract of employment. You need to find her contract quickly ...
The recent decision of the High Court in Bartholomews Agri Food Ltd v Thornton is an important reminder as to how the law views restrictive covenants. Attempts to place restrictions via contracts of employment on post-termination activities will be deemed unenforceable unless the restrictions are carefully drafted and tailored to the particular circumstances.
Michael Thornton was employed as an agronomist, providing advice to customers on issues such as crop planting, soil condition and crop nutrition. Bartholomews sought an interim injunction against him to prevent him taking on a new role on the expiry of his notice period, part of which would involve providing agronomic advice to customers. The restrictive covenant in his contract of employment sought to prevent him from engaging in work supplying goods and services of a similar nature to customers of Bartholomews for 6 months following termination.
Bartholomews had to persuade the Court that it had legitimate business interests requiring protection and that the restrictive covenant was no wider than was reasonably necessary to protect those interests.
The High Court observed that the restrictive covenant was not well drafted. Bartholomews claimed that Mr Thornton had developed relationships with 52 customers for whom he was the sole agronomic advisor, and other customers as part of wider marketing activities. They argued they were seeking to protect their confidential information and customer connections. Mr Thornton argued that the restrictive covenant was in restraint of trade, unreasonable and unenforceable.
The Court agreed with Mr Thornton. The Court relied on the principle that a covenant which would have been unenforceable when it was first imposed given the status and role of the employee at that time will remain unenforceable, even if the employee has subsequently moved to a role or acquired responsibilities which would render the covenant reasonable. The contract in question dated back to 1997 when Mr Thornton joined the business as a trainee agronomist. In this role he had no experience and no customer base. A clause which prevented him from working with any of Bartholomew's existing customer base for 6 months was therefore inappropriate and constituted a restraint of trade, thus rendering it unenforceable.
Further, the covenant prevented Mr Thornton dealing with any customer of the business, regardless of whether he had had any prior dealings with them. The customers with whom he worked represented only just over 1% of the business' entire turnover. The Court considered it would be manifestly unfair in these circumstances to prevent him from working with customers representing the other more than 98% of turnover.
Had the restriction been limited to customers with whom Mr Thornton had dealt for a period prior to the termination of his employment, the Court stated that would have been sufficient.
Unusually, the employee's contract provided that the business would continue to pay him throughout the 6 month period during which the post-termination restrictions applied. The business argued that this made the restrictions more reasonable but the Court held that it would be contrary to public policy to allow employers to "purchase" a restraint of trade in this way.
What lessons can we learn from this decision?
- Restrictive covenants cannot be drafted on a one size fits all basis – you need to consider the type of role the employee is taking on, the likely extent of their contact with key customers/ clients, suppliers and employees and the extent to which their activities post-termination could pose a risk to your business.
- If those factors change over time, review the suitability of the restrictions including where the employee is promoted – it may need to be a condition of the promotion that the employee agrees to more onerous restrictive covenants.
- Limit the period of restrictions to the length of time it would take to introduce the relevant customers to another employee and develop that relationship.
- Ensure that restrictions are focused on the customers or category of customers with whom the employee is expected to have contact and dealings.
Restrictive Covenants – One Size Doesn't Fit All
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
