Restrictive Covenants

Restrictive covenants raise a number of issues, all of which are potentially an issue when an employee considers leaving and joining a competitor. Some of the questions that can arise include:

(i) Was consideration given?

If a contract was entered into on joining then that is generally good consideration.  Problems can arise when the contract is signed after a detailed offer letter has been accepted or when a formal contract is provided after the employee has been working for a several weeks.

(ii) Does the particular restriction go no further than is reasonably necessary to protect the employers legitimate business interests?

(iii) Did the employee leave in response to the employer’s repudiatory breach? 

If the employee did then the restrictions are of no effect because of the employer’s breach but the employer can equally argue that there was no repudiatory breach, or, if there was, that the employee delayed too long before accepting the employer’s breach.

(iv) Who can be sued just the departing employee or the employee and the new employer?

This was the one of the issues we arose in Quilter Private Client Advisers v Falconer & Continuum. QPCA and Continuum were financial advisory businesses which competed with each other. Miss Falconer had been courted by Continuum since 2016 but in 2019 she joined QPCA to take over a client portfolio from an employee who was retiring. However, after six months she resigned to join Continuum, by that time she had been introduced to a sizeable number of clients.

Quilter commenced proceedings against both Miss Falconer and Continuum. Miss Falconer argued that she had raised a number of grievances and been constructively dismissed. Her case was that she had raised grievances about the lack of administrative support, long hours and the restricted range of products she could offer. She alleged that when these issues had been raised in May she had been shouted at and belittled; further complaints had been raised in June and she resigned in July.

The High Court found that Miss Falconer had not been constructively dismissed. In reaching that conclusion it noted that when an employee decides to accept a repudiatory breach it must do so unambiguously and with sufficient alacrity. The Court noted that whilst there were teething troubles in the new employment relationship they did not amount to conduct, which objectively considerably undermined the relationship of trust and confidence. The Court also found as a fact that whilst there were undoubtedly problems, they did not cause Miss Falconer to resign.

Having found that she was not constructively dismissed, the Court considered the issue of whether she had delayed too long in resigning. The evidence was that she had raised concerns, waited a month before raising further concerns, waited another month and then resigned giving her two weeks’ contractual notice.

The Court noted that this delay amounted to more than that “of a wronged employee who stays on for a bit whilst he or she considers their position”. In those circumstances had there been a breach by Quilter, Miss Falconer would have delayed too long before accepting the breach.

The case also considered a number of other important issues.

(i) Confidential Information

Confidential Information was defined in the contract as being information “which [Quilter] considers confidential”. The Court found that this was an unreasonable restraint of trade and unenforceable as it was potentially without limit.

(ii) Whether Continuum could be liable for inducing a breach of contract by Miss Falconer.

The Court found that such a claim would have failed on the facts because although Continuum would have known that there was a contract, it would not have known what Miss Falconer was asked to do, would be a breach of that contract.

Some employers will, when an employee leaves to join a competitor write to the new employer to advise it of the post-termination restrictions, putting the new employer on notice should the employee later act in breach. Obviously, by providing the contract terms, the new employer has the opportunity of finding ways and means to avoid the express wording, or to consider in detail the reasonableness of the restrictions.

As the economy begins to build and employees begin to move roles, it is essential that employers avoid acting in such a manner that employees are able to claim they have been constructively dismissed. If such claims are alleged in response to threats to enforce restrictive covenants, employers should examine an employee’s actions carefully to ensure that they have considered the issue of delay thoroughly.

Whilst restrictive covenants are a tool that a business can use when employees leave, the most effective solution is to ensure that relationships with customers are quickly re-established so that they do not wish to follow the departing employee. Employers should also be astute to ensure that confidential information has not been downloaded or removed in the days or weeks before departure.