It’s a well-established principle that in order for a contractual term restricting an employee’s activities post-termination of employment to be enforceable, the employer must show that it has a legitimate business interest to protect and that the protection sought is reasonable. In the recent case of Bartholomews Agri Foods Limited v Thornton the High Court reinforced this point; in addition it confirmed that the reasonableness of a covenant is judged at the time it is entered into and the obligation of an employer, to continue to pay an employee during the duration of a covenant, will not make it enforceable.
At the start of his employment in 1997 as a trainee for Bartholomews, Mr Thornton entered into a six month post termination restrictive covenant which prevented him from being ”… engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area….”.
Unusually the covenant also stated that the employee would be paid his full benefits during the six month period of the covenant, in the event it was exercised. Over 18 years later Mr Thornton resigned from his employment and his employer sought to rely on the restriction.
The High Court held that the restrictive covenant was unenforceable and identified three key areas where the employer had fallen down.
• The covenant which the employer sought to rely on dated back to 1997, when Mr Thornton “…was a trainee agronomist with no experience and no customer contacts…” the Court also went on to say, “…its terms were…….. manifestly inappropriate for such a junior employee”. The High Court confirmed that the enforceability of a restrictive covenant is judged at the time it is entered into, not at the point at which the employer seeks to rely on it. In this case the restrictive covenant was unenforceable in 1997 when Mr Thornton started employment, and this position did not change regardless of his subsequent promotion to a role where the covenant would have been regarded as reasonable.
• The covenant was poorly drafted and “plainly far wider than is reasonably necessary for the protection of Bartholomews’ business interests”. The covenant applied to all customers of Bartholomews regardless of whether Mr Thornton had dealt with them or carried out any work for them.
• Mr Thornton’s contract contained a provision that if the employer sought to rely on the restrictive covenant ”… the employee’s full benefits will be paid during this period”. Will this make any difference to its enforceability? The High Court gave a very clear “no” to this question stating “…it is contrary to public policy in effect to permit an employer to purchase a restraint”.
So how can employers put themselves in the best position possible to ensure restrictive covenants can be relied upon?
• Review restrictive covenants to check that they do not impose an unreasonable restraint of trade. If they do, they will be unenforceable.
• Covenants should be drafted no wider than necessary to protect business interests.
• Tailor the covenants to the employee’s specific role and consider the threats which the business may suffer if that employee left.
• On each promotion or role change, review and refresh covenants to make sure they remain relevant to the employee’s position and seniority.
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Blog posted 14 April 2016