Companies need to get it right to protect against competition

Companies looking to protect their business by relying on non-compete clauses for key employees should check that any post-termination restrictions are reasonable.

When an employee leaves and there is a threat of commercially sensitive information about operations and customers being passed to a competitor, the restrictive covenants in the contract of employment are effectively the safety net in protecting know-how and relationships. A recent case heard in the High Court has shown that while the court will enforce non-compete clauses, restrictions must go no further than protecting legitimate business interests. It also highlighted the importance of being clear about any so-called ‘garden leave’ where employees work out their notice period at home.

In Square Global Limited v. Leonard, a broker was contracted to give a six-month notice period, together with a restriction on working for a competitor for six months after the end of his employment. When he handed in his notice, with immediate effect, and left to work for a competitor, his former employer relied on the employment contract. In response, the broker claimed he had been constructively dismissed, arguing this released him from his obligation to give notice and from the non-compete clause.

But the High Court upheld the employer’s argument and said that the six-month non-compete clause was reasonable and went no further than necessary to protect the employer’s legitimate business interests. The court also decided that the broker was required to serve out his six-month notice period, on top of the six-month restriction, keeping him out of the market for a total of 12 months.

The law has always regarded a covenant ‘in restraint of trade’ as being void, because it is anti-competitive and therefore against public policy, so it is only enforceable if it is strictly limited to what is necessary to protect a business.

James Twine – Partner and Head of Business Services commented: “This is a reminder that employers need to ensure that anti-compete clauses and other restrictive covenants are reasonable and focus on activities which would involve the employee directly competing with their old employer. Trying to do a catch-all is impossible to enforce, but when the clauses are drafted correctly, they can and will be enforced. While the case also shows the value of a properly drafted garden leave clause. Most employers are under the misapprehension that they have an unfettered right to place an employee on garden leave, when in reality placing an employee on garden leave will be a breach of contract unless the employee’s contract provides for such an arrangement”