In the current economic climate, businesses are under increasing pressure to attract and retain top talent. With inflation and the cost of living soaring, wages are being squeezed, and many employees are being tempted to find new jobs with higher salaries and better benefits packages.
Departing employees at any level can pose risk to a business, given the impact on team morale, increased work load on other members of the team where there is a gap before a replacement starts, and the costs and management time involved in resourcing a replacement. Losing senior employees, those with strong business connections or employees privy to sensitive commercial information can pose a particularly acute threat to employers – with the potential of substantial harm to the business if those individuals move to a competitor.
Often this risk can be addressed and mitigated by including post-termination restrictive covenants in contracts of employment for senior members of staff, for those with strong business contacts, or that are privy to confidential or business sensitive information. These (provided they are properly drafted and are reasonable in the circumstances) can prevent an employee from engaging in certain competitive activity, or activities, for a defined period after their employment has ended.
Employment contracts – restrictive covenants
The difficulty with restrictive covenants is the enforceability of them.
Restrictive covenants are considered a ‘restraint of trade’. In order to be lawful (and enforceable), a business has to show it has a legitimate interest to protect, and the restriction (when considering its duration, scope and impact on the employee) goes no further than necessary to protect that interest.
Non-compete restrictions are notoriously difficult to justify, given the substantial impact they have on the employee, including their ability to secure alternative employment. This has been compounded by the Government’s recent consultation, which proposes to introduce a statutory cap on the duration of non-compete clauses of 3 months.
With this in mind, some employers are starting to ‘think outside the box’ to find different ways of protecting their business, which has been highlighted by a couple of recent cases.
In Steel v Spencer Road LLP, the High Court had to consider whether a bonus claw-back provision amounted to a restraint of trade and was therefore unlawful. Spencer Road operated a substantial bonus scheme, under which entitlement to a bonus was conditional upon an employee remaining in employment and not being under notice of termination for three months following the date on which it was paid. The employee in this case gave notice to terminate his employment one month after receipt of a substantial bonus, so Spencer Road sought repayment under the terms of the contract.
The employee refused, claiming that the effect of the clause was to disincentivise him from seeking alternative employment and was therefore a restraint of trade. In particular, he argued that given the terms of the bonus scheme, and given he had a notice period of three months, he effectively would have to remain in employment for over six months from receipt of the bonus before he could leave.
The High Court disagreed with the employee. While there was no doubt that the clause acted as a disincentive to leave employment for a period of six months, this was not the same as a restraint of trade, as it did not impose any restrictions on where he might work after his employment terminated. Whilst there are cases where the severity of the consequence might be disproportionate to the benefit received, this was not one of those cases. Neither did the provision amount to a penalty clause. The High Court reached this conclusion despite the fact that the employee’s contract also contained restrictive covenants including a 13 week non-compete restriction, holding that the existence of these restrictions did not affect its analysis of the claw back provision.
Jump Trading International v Couture also considered a novel way of seeking to protect the business from departing employees. This case concerned an application by the employer for an interim injunction to prevent a former employee from working for a competitor. Two questions arose. The first was whether the employer’s delay in seeking the injunction meant that an injunction should not be granted. The second was whether there was a serious issue to be tried, meaning did the employer have an arguable case? It is the second question that is of particular interest, as it concerned the application of an unusual restrictive covenant.
The restrictive covenant provided that the employer could specify the duration of the non-compete up to a maximum of 12 months, by giving notice of this within 20 days of termination. The question was whether this would be unenforceable for uncertainty. This is usually the case where ‘cascading’ clauses of two or more restrictions of differing lengths and severity are used, as the employee wouldn’t know which one was enforceable without a court order.
In the Jump case, the High Court considered that use of this particular covenant was distinguishable from a ‘cascading’ covenant because the employee knew there was a maximum restrictive period of 12 months when they signed their contract of employment. In addition, the High Court considered the employee was aware they would be informed by the employer of the actual duration of the restriction after their termination. Although there was still an element of uncertainty, there was an arguable case that the covenant was enforceable, and so the matter proceeded to be determined at a speedy trial. It will be interesting to see how the Court deals with this if it gets to a full hearing.
These cases illustrate different ways in which employers have sought to get round the ‘enforceability problem’, by seeking creative contractual provisions to protect their business from departing employees. These cases also suggest that courts may be open to enforcing or at least engaging with these different types of solution, which may be helpful to employers.
In these challenging times, the use of bonus claw back provisions is of particular interest and may give employers a means of seeking to retain key employees and protect their business as an alternative or in addition to restrictive covenants. However, such clauses must be carefully considered and drafted, particularly given the tax and legal implications of requiring an employee to repay something they have already received (and been taxed on).
Legal advice benefits to businesses
At Boyes Turner, we have extensive experience advising employers on the application of restrictive covenants, and finding creative drafting solutions to protect their business. We also can advise employers on other benefits and strategies, which may help to retain employees at all levels. If you’d like to know more or require any assistance, please contact our employment law team today on [email protected].
Training for your teams
We also appreciate businesses may want to use a different approach to attracting and retaining talent, therefore we provide bespoke training courses to suit all levels of management. This, in turn, will engage your people with professional, individual development and improved team performance, to also help limit departing employees.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.