As we approach the one-year anniversary of COVID restrictions first being introduced in the UK, we consider what effect the furlough scheme may have on the enforceability of post-termination restrictions (“PTR’s”.)
Post-termination restrictions, sometimes called restrictive covenants are often contained in employment contracts as a mechanism for employers to protect their business against employees leaving and taking competitive action against them.
PTR’s are only enforceable where they are necessary to protect a legitimate business interest of the employer (e.g. confidential information, trade secrets, stability of the workforce and business connections, such as clients and customers) and where they go no further than is necessary to protect those interests. In practice, this means that they should be reasonable and proportionate in terms of scope, length of restricted period and any geographical territory to which they apply, although the latter is becoming less relevant in a global society in which multi-national companies operate across borders.
For this reason, non-solicitation, and non-dealing clauses, which prevent an employee from soliciting or working with clients/customers that they worked with during their employment, are often drafted with a ‘look back’ period limiting the ‘pool’ of clients/customers that are restricted. These typically cover clients or customers with whom the employee has had dealings within the 6-12 months prior to their termination date.
The pandemic has meant that many businesses have been forced to close temporarily due to COVID restrictions, particularly in the retail, hospitality, leisure, health, and beauty sectors. Many employees have been placed on furlough. Some may have remained on furlough since the introduction of the scheme in March 2020. In these situations, the employee may not have been in contact with clients or customers during the ‘look back’ period stated in their PTRs. This means that the non-solicitation or non-dealing clauses may not ‘bite’ at all. Arguably, in this situation, the employee may not actually pose a great threat to the business, as their relationship with clients or customers may have been ‘diluted’ because the employee has not been actively working and maintaining these client relationships.
What if the employer is currently not trading due to lockdown restrictions? For example, a restaurant that has closed and is not offering take away services. Can the employer enforce a non-compete PTR if an employee leaves and goes to work for a competitor that is trading? In this situation, it is arguable that the employee will not be in breach. After all, there will be no competitive activity if the employer is not trading. Of course, each case would turn on its own specific facts and the precise wording of the non-compete restriction. The status of the employee will also be a significant factor, as will the employer’s plans to trade once it can do so after lockdown restrictions have been lifted.
If the wording of the non-compete restriction prevents the employee from providing the same or similar services to those which they were directly involved in providing in the 6 or 12 months prior to their termination date, then if they have been furloughed for the relevant look back period, the employer will not be able to enforce the non-compete provision. This will come as a nasty surprise to many employers who should review their PTR’s now.
Here are some actions that employers could take to help reinforce the effectiveness of their PTR’s:
- Where an employee has been on furlough for a long period and there is a concern that the ‘look back’ period on a PTR is going to render the restriction unenforceable, an employer could consider offering flexible furlough, if there is some work which the employee could do, to bring the employee’s exposure to clients/customers back within the relevant ‘look back’ period.
- Similarly, if an employee on furlough resigns, the employer could require them to work their notice period if there is some work for them to do, so that they are in contact with some clients and customers for a period before their employment terminates. This may be particularly attractive, as furlough pay cannot be claimed from HMRC in respect of employees who are under notice of termination (given or received.) However, this strategy may also carry some risk as some non-solicitation and non-dealing PTRs require an employee to have had ‘material dealings’ with clients or customers. An employer may not want an employee that is on their notice period working closely with key clients and customers. An employee reconnecting with clients after a period of furlough might have more success persuading those clients to work with them at a different employer than if they had had no contact with them for a long period.
- Employers could consider offering the outgoing employee a settlement agreement with newly drafted restrictions; assessing which PTRs are no longer relevant and can be waived, then proposing new restrictions with a ‘look back’ period covering the relevant time when the employee was actively working or on flexi as opposed to full-time furlough. PTR’s entered into by way of a settlement agreement are more likely to be adhered to by the employee because they will have obtained legal advice from a solicitor prior to agreeing to them and because they will be receiving financial compensation as consideration for entering into the new PTR’s and the settlement agreement. The settlement agreement should include a term requiring the employee to repay the ex-gratia termination payment if they act in material breach of any of the terms in the settlement agreement, including the PTR’s. This should have sufficient deterrent effect to increase adherence to the terms of the PTR’s. We would only recommend this option for senior level employees who have considerable exposure to, influence over and good working relationships with clients and customers who could cause considerable or irreparable harm and damage to their employer’s business, if they were to breach their PTR’s and they were found for the reasons set out above to be unenforceable.
As mentioned in our previous blog there is currently a government consultation on the reform of the enforceability of non-compete clauses in employment contracts. The Government’s proposals are intended to encourage innovation and counteract the negative effects on the economy and the increasing rates of unemployment because of the pandemic. The consultation is due to end on 26 February 2021. As an alternative to an outright ban on non-compete restrictions, the Government also proposes introducing a requirement on employers to pay employees during the restricted period and imposing an upper limit on the duration of the restriction. This is not a novel approach to PTR’s, and is akin to the stance taken in France, Germany and Italy, so despite Brexit, we may in future adopt a similar legal approach to our European cousins with regards to the enforceability of PTR’s.
