Employer’s Case Study – Post Termination Restrictions

Q: A senior manager in a pharmaceutical company, with extensive contacts and "insider" knowledge, is considering leaving his employer to join a competitor. The employer wants to know what legal action they could take under the individual's contract of employment to protect the business.

Important points:
  • Most senior executives’ terms and conditions of employment contain clauses, which restrict what they can do once they have left their employment (in terms of for whom they can work and how they can use the knowledge that they have gained).
  • The basic position in law is that a restriction on an employee’s right to work where they wish is an unlawful restraint of trade and is therefore unenforceable.
  • There is an exception to this where an employer is able to show that imposing a restriction on an employee after they have left the company is needed in order to protect the legitimate business interests of the employer.
  • In this case, the knowledge that the employee has gained would potentially cause serious damage to the business of the employer, if it were disclosed to a rival company. The employer would therefore have a strong case for saying that they are trying legitimately to protect business interests.
  • The employer needs to ensure that the post-termination restrictions in the contract are drafted in such a way that they only go as far as is reasonably necessary.
  • The courts will not uphold a clause that is too wide and have, historically, adopted a strict approach. It is wise therefore to limit the time for which the restriction will apply, as well as the geographical area (e.g. that the employee may not work for a competitor pharmaceutical company within a [1 mile] radius of the employer for [6 months] after the termination of the contract).
  • It is advisable to add a "blue-pencil" clause into the contract that states that, should any part of the restrictive covenant be deemed by the court to be too broad, the offending wording can be removed without affecting the enforceability of the remainder of the clause.
  • The employer may wish to impose a period of garden leave on the employee (if this is provided for in the contract) to reduce the likelihood that they will have useful, up to date information available to them when they leave. If the parties have agreed a long notice period, this can be an effective tool.
  • The court, in deciding whether to enforce the restrictive covenant, will look at all of the circumstances, including the size of the employer, the nature of the work, the industry in general and the seniority of the employee.

It is important that proper procedures are followed, even where there is animosity between the parties. Case law states that if the employer’s treatment of the employee is sufficiently poor to constitute a repudiation of the contract, the employee will be released from all of the post termination restrictions.