How To Restrict The Activities of Former Employees
Author: Matthew Kilgannon
We often advise clients regarding the enforceability, or otherwise, of clauses seeking to limit the activities of former employees. Most people are of the view that such clauses cannot be enforced, but, if properly drafted; such post-termination restrictions can be enforceable.
There are different types of restrictions that can apply once the employment has ended. However, one of the most powerful ways to restrict an employee’s activity is ‘garden leave’, which applies for their notice period. Garden leave means the employee does not attend work, yet, the individual remains employed meaning s/he owes your business higher duties than they do once their employment ends (and such restrictions trigger).
After termination, you can seek to limit someone’s activity by stopping them:
- Poaching staff;
- Poaching customers/clients;
- Dealing with customers/clients; and/or
- Competing/working in competition.
The above restrictions increase in severity, so a non-compete clause is seen as more restrictive than, say, a non-solicitation/poaching clause.
With advancements in technology, we are seeing a reduction in geographical limits, as (for most employers) it now makes little difference where someone is based. Conversely, we’re seeing an increase in non-dealing clauses.
Such restrictions should also dovetail with other contractual clauses, such as, confidential information and intellectual property rights.
A leading case in this area is the decision in Coppage v Safety Net Security Ltd where the Court of Appeal gave guidance on how to ensure such clauses are enforceable.
We see this area as vital to protect your business. If you would like to know more about this area of law, please contact us for our FREE and easy to follow checklist.
Coppage v Safety Net Security Ltd
Mr Coppage joined Safety Net and later became a director with the title of ‘Business Development Director’. At that point he entered into a new contract of employment that prevented him from soliciting clients of Safety Net.
Mr Coppage described himself as "a key figure in [Safety Net's] business operation being the main person who was able to bring in and retain new business".
Safety Net began a redundancy process with Mr Coppage. It considered that there was no need to employ a Business Development Director and planned to absorb his function.
Instead, Mr Coppage resigned by email. An hour later, Mr Hadley, a junior colleague of Mr Coppage’s also resigned. The next day, Mr Hadley incorporated Freedom Security Solutions Limited, ("Freedom"), However, the High Court judge found that Mr Hadley was only the face of Mr Coppage's enterprise and that it had been Mr Coppage who had been directing Freedom from its incorporation; even though he formally became its director much later.
Immediately following Mr Coppage’s resignation, there were 175 texts and 135 calls from Mr Coppage to five of Safety Net’s customers. All five of which became customers of Freedom.
Safety Net's claim was premised on a breach of the non-solicitation clause in Mr Coppage's contract and/or on breach of fiduciary duty. The judge found that each claim was satisfied. The judge concluded that the non-solicitation clause in question was reasonable. The Judge emphasised two points; one, that Mr Coppage played a key role in Safety Net as its outward "face" and, secondly, that Mr Coppage had contact with all of Safety Net’s customers since he had became director. The Judge ordered Mr Coppage and Freedom to pay £50,000 in damages.
Court of Appeal
On appeal, Mr Coppage claimed the non-solicitation clause was unreasonable because it ought to have been restricted to current customers only, namely, customers "within 6 or perhaps 12 months of the termination of the contract".
In reviewing this area of law, general principles were re-iterated by the Court of Appeal as follows:
(i) Post-termination restraints are enforceable, if reasonable, but covenants in employment contracts are viewed more jealously than in other more commercial contracts, such as those between a seller and a buyer.
(ii) It is for the employer to show that a restraint is reasonable in the interests of the parties and, in particular, that it is designed for the protection of some proprietary interest of the employer for which the restraint is reasonably necessary.
(iii) Customer lists and other such information about customers fall within such proprietary interests.
(iv) Non-solicitation clauses are therefore more favourably looked upon than non-competition clauses, for an employer is not entitled to protect himself against mere competition on the part of a former employee.
(v) The question of reasonableness has to be asked at the outset of the contract, looking forwards, as a matter of the covenant's meaning, and not in the light of matters that have subsequently taken place.
(vi) In that context, the validity of a clause is not to be tested by hypothetical matters which could fall within the clause's meaning as a matter of language, if such matters would be improbable or fall outside the parties' contemplation.
(vii) Because of the difficulties of testing in the case of each customer, past or current, whether such a customer is likely to do business with the employer in the future, a clause which is reasonable in terms of space or time will be likely to be enforced.
In view of the above and the fact that the restrictions were “only” six months the Court of Appeal upheld the High Court’s decision. It too found that the restrictions were enforceable, Mr Coppage was in breach of his restrictions/fiduciary duties and that the level of damages was appropriate.
This case is important when dealing with post-termination restrictions; from drafting to enforcement. Provided they are appropriately drafted given the risk posed by any particular individual, they should be upheld by the Courts.
A myriad of factors need to be considered when dealing with restrictions, in particular, their drafting. Please contact us for our easy to follow FREE 10 point checklist to see how effective your restrictions might be.
For the Court of Appeal’s decision, please click here
If you would like to speak with us regarding this area, or for more information, please contact a member of the Employment team.