Are you restricted on your future employment options?
Andrew Egan from Andrew Egan Associates with advice on post employment restrictions
I AM often asked by employees when they leave their employment as to whether they can be prevented from working for a competitor of their former employer.
There may be terms in the employment contract that say that the employee cannot work for a competitor or have contact with customers or clients for a period of time after the employee leaves the company. These are called ‘restrictive covenants’.
The enforceability of such non-compete covenants can lead to difficult questions, especially when an employee is also a shareholder in the employer’s company.
This issue was recently raised in the High Court in the case of Law By Design Ltd v Ali. Ms Ali was employed as an associate director of Law by Design Ltd (LBD) in 2013. LBD provided employment law advice to NHS clients.
In 2016, she entered into a shareholders’ agreement with LBD.
This included a restrictive covenant which stated that she could not “be engaged, concerned, interested in, or assist a business which competes, directly or indirectly, with a business of the company” in an area in which the company had operated in the previous 12 months.
Ms Ali was promoted to a salaried partner in 2018 and was given a new employment contract in 2021, with a pay rise.
Her contract contained a 12-month non-compete clause. However, this was narrower than the clause which she had agreed to in the shareholders’ agreement.
A few months later, she resigned to join another national law firm, which also provided legal services in the same area as LBD.
LBD sought an injunction in the High Court.
The court concluded that LBD had a legitimate business interest to protect.
It granted the company an injunction to enforce the 12-month non-compete restriction in her employment contract.
It also decided that the restriction in the shareholders’ agreement was too widely drafted to be enforceable.
LBD was entitled to protect the customer connections built up by LBD employees providing legal services to NHS clients.
The principal part of LBD’s business was the provision of employment law services to NHS bodies in the North West of England and to a single NHS body in Hertfordshire. These were the particular services to be provided by Ms
Ali for her new employer.
The restrictions in her employment contract were no wider than reasonably necessary to protect LBD, and were therefore enforceable. Conversely, the non-compete clause in the shareholders agreement was held to be too wide to be reasonably necessary to protect LBD’s legitimate business interests. Non-compete clauses in shareholders’ agreements are normally more likely to be considered reasonable and enforceable, given the parties’ relatively equal bargaining power, compared with the employer/employee relationship.
Such restrictions are negotiated in a commercial context and, when imposed in the acquisition of a business, aim to prevent a seller from damaging the goodwill of the business which they have just sold or transferred.
It is less common for a 12-month non-compete restriction to be upheld in an employment context.
These are more difficult to enforce than non-dealing or non-soliciting clauses.
The case is a good reminder to businesses that even if they can establish a legitimate business interest, it is important that any noncompete clause is drafted in an employment contract whilst ensuring that it is no wider than necessary to protect that business interest.
Last year, a Government consultation looked at the use of such non-compete clauses. Although no outcome has yet emerged, one option is to make such clauses in contracts of employment only enforceable where the employer compensates the employee for the period that the clause prohibits them from working for a competitor or starting their own business.
Other options include a statutory time limit on the duration of a non-compete clause, or banning clauses altogether.
Time will tell whether a relaxation of such clauses, if recommended, will have the hoped-for consequences. If your business needs to review and update your employee’s non-compete covenants, or you are an employee who has left their employment and are faced with such restrictions on your future employment options, please don’t hesitate to contact me on 07904 391756 or (01635) 890560.