Covenants - I'm leaving but you can contact me at my new employer...

Posted on May 10, 2021

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Advocate John Aycock of M&P Legal outlines the tricky issues that arise when contract restrictions hamper an employee’s new venture and proposes some basic preventative steps

Would you follow your hairdresser to their new salon or your financial adviser to their new business? Many locally would like to, because compact communities tend to magnify client loyalty. And who doesn’t need a haircut right now.

Economic conditions are ripe for rival businesses to poach leading players with following. But the law intervenes to regulate the balance between an individual’s client connections and the employer’s business interests. Called by various names, these restraint of trade or non-competition or restrictive covenants seek to fetter an ex-employee’s activities and connections after the contract has ended. And these contract of employment restraints are back in the news because the UK Government is consulting on measures to reform their law.

The dominant pattern I notice is that such covenants frequently receive insufficient attention at the time of making the employment contract which then stores up unwanted issues for when the employee leaves. Understandably in the excitement of a new job, and perhaps not wanting to rock the boat, the would-be employee is happy to sign a contract without detailed scrutiny of how that contract affects their ability to work elsewhere when the employment relationship ends. But the making of the contract is precisely the time when these restrictions deserve close review and sensible negotiation - especially as the reasonableness of the restriction is judged as at the date it was made.

Too often, employment contracts are hastily signed and onerous restrictive covenants are thereby agreed. Come termination, this places the employer in the driving seat when attempting to curtail future competitive activity by a departing employee. But such leavers do have significant rights even when they have signed a contract incorporating restraint of trade clauses (and note covenants in an unsigned contract may still be deemed accepted). In fact, Isle of Man common law reinforces the English law position which is that all non-compete clauses are unenforceable unless the employer can prove that it protects a legitimate business interest and the restriction is no wider than reasonably necessary to protect that interest.

In the UK, the Government is looking at whether post termination non-compete clauses in contracts of employment unduly stifle business activity and the entrepreneurial spirit. In 2016, the UK Government also looked at this and concluded that restrictive covenants were a valuable and necessary tool for employers to help protect their business interests and did not unfairly impact on an individual’s ability to find other work. The current UK Government’s stated objectives of boosting innovation, creating jobs and increasing competition have now prompted another review of non-competition clauses, notwithstanding that the common law underpinning the delicate balance between the two interests has been forged over centuries of case law.

In broad terms, restraint of trade clauses are generally seen as a combination of the following types:

  • Non-competition, preventing an employee working for a competitor;
  • Non-solicitation, preventing the employee enticing away clients of their former employer;
  • Non-dealing, preventing the employee dealing with former clients (irrespective of who approached whom); and
  • Non-poaching, preventing the employee poaching staff of their former employer.

The legal principles governing these derive from the common law doctrine of restraint of trade which recognises that, on the one hand, public policy favours upholding private contracts made between parties but on the other hand public policy promotes freedom for individuals to work without restriction.

Far too often, restrictive covenants are perceived as binary in that departing staff may consider them to be completely unenforceable, whereas the employer will say ‘you agreed to them in your contract’. Often progress is made by a middle path struck between the parties sometimes involving undertakings given by the ex-employee and perhaps assurances given by the new employer.

It is significant that the burden of proving that a restriction is reasonable falls on the ex-employer. They do often satisfy that burden. Forecasting whether the court will view a restriction as reasonable is tricky, as each case depends on its own facts. The Isle of Man has had some noteworthy judgments including a seminal 1997 case about a Douglas hairdresser’s restrictions on working within a one mile radius of her previous salon and soliciting clients plus some big ticket disputes in the e-gaming sector as to post termination confidentiality restrictions.

For my part, it is felt the application of some basic practices would reduce the number of nasty surprises or unwanted disputes once the employment parties go their separate ways. I would therefore advocate employers and employees considering these points:

As stated, the crucial time to consider covenants is when entering the contract so that problems are not stored up when you exit the contract;

  • In proposing restraint of trade terms, an employer should carefully consider and adopt only the minimum protection of its business interests considered reasonable in those circumstances. Thus review whether a twelve month or Island-wide restriction is really needed and curtail it as appropriate. Three to six months might be enough to get a replacement up and running;
  • The employer should certainly tailor restrictions to each contract rather than adopt a template approach which sees junior staff having the same restrictions as those in management. Blanket provisions will be hard to prove as reasonable;
  • When negotiating the terms of a new contract, the employee should not be shy in trying to reduce the restrictions. There is usually more good will when the employment contract starts than when it ends and an employee might be surprised how willing the employer is to tailor such covenants;
  • Always review restrictions on a change of role, especially a promotion, given that the time of making the restriction governs its reasonableness;
  • When the contract ends, clarity of obligation should be established. An employee who affirms their restrictive covenants on termination will find it harder to argue that such covenants are unreasonable, because their original agreement has been revived. For employers therefore it is a good idea to obtain such affirmation from staff. For employees, this is another opportunity to negotiate a suitable curtailment of the restrictions.

A departing employee, who might be joining a competitor, must be very careful on a number of fronts. Preparing to compete while still employed can itself breach contract terms. Then on termination there may not only be restraint of trade provisions but also significant surviving confidentiality obligations, not least the return of all company property to an employer together with enduring clauses protecting the employer’s confidential information, such as long client lists, from misuse. These are frequently misunderstood.

If the contract termination is itself the subject of an employment settlement agreement then that document should also expressly deal with post termination restrictions which can either be deployed in full, dispensed with or compromised by agreement.

In its response to the UK consultation, the Employment Lawyers’ Association (“ELA”) has robustly argued that there is no clear evidence that the system needs reforming. The ELA says that the body of law has been developed by the courts as a proven and effective means of striking a fair balance between the interests of the employee and the employer and that legislative intervention is not required. Looking from afar, it will be interesting to see how the UK deals with this and doubtless the Isle of Man would likewise be very cautious in effecting statutory change to such a well-trodden legal doctrine that evolves through case law. Food for thought when next having your hair cut.

John Aycock is head of the M&P Legal employment unit with thirty years’ experience of advising on labour law matters in three jurisdictions and is a member of the Employment Lawyers’ Association.

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