When is a post-termination restriction unreasonable?
Post-termination restrictions are a constant source of debate and controversy. It is often unclear whether they are enforceable, and in late 2020 the government ran a consultation on reforming post-termination non-compete clauses in employment contracts.
However, as we await the outcome, the issue continues to be brought to the courts. This year’s standout case was Quilter Private Client Advisers Ltd v Falconer & Anor, which highlighted the challenges of enforcing post-termination restrictions.
What are post-termination restrictions?
They are clauses within employment contracts that prevent exiting employees from taking key clients, employees or suppliers from their former employer. These are often called non-solicitation or non-dealing clauses. They can also prevent former employees from working for a competitor, often referred to as non-compete clauses.
Why are there issues with enforcing them?
These clauses are only justifiable if they go so far as to protect a “legitimate business interest”, for example to prevent confidential business information being divulged to a competitor. As such, clauses that go further than necessary, for example by covering too broad a geographic area or business interest, are unenforceable.
What happened in Quilter?
Ms Falconer had only recently started work as a financial advisor at Quilter. Her employment contract contained a 12-month non-solicitation and non-dealing clause, along with a nine-month non-compete clause. As a new employee, she was subject to a six-month probationary period, with a notice period of two weeks. Ms Falconer resigned before the end of her probationary period and joined a competitor, so Quilter brought a breach of contract claim against her and her new employer.
The High Court found the non-compete clause to be unenforceable for three main reasons:
- It failed to consider how long Ms Falconer had worked at the business; she had very little opportunity to build a client base but would still be bound for nine months.
- The shortness of the notice period was a reflection on the company’s view that Ms Falconer’s services were not that important to the business until she’d worked for them for longer.
- The scope was found to be too broad, as it sought to prevent Ms Falconer from working in competition with Quilter for prospective clients.
This case draws attention to the need for more nuance in post-termination restrictions. Employers should consider what is suitable for the employee in question, taking their length of service and seniority into account, rather than a one-size-fits-all approach.
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Jenny works in our employment law team. She helps clients with a range of employment related matters including contracts, general employee relations and HR.