Executive Employment Services – Reviewing Post-Termination Restrictions
1 August 2022
It is common for executives to have post-termination restrictions in their service agreements or contracts of employment. Typical restrictions would include:
- Non-compete – preventing the executive from joining a competing business or setting up their own business;
- Non-solicitation – preventing the executive from soliciting customers or prospective customers of their employer for business;
- Non-dealing – preventing the executive from undertaking any work or having any dealings with customers or prospective customers of their employer;
- Non-poaching – preventing the executive from poaching other employees from their employers business.
- Confidential Information – preventing the executive from using or divulging confidential information concerning the business for their own benefit or that of their new employer.
The other issue that arises with restrictions is the length that they apply for; 6 months is typically a reasonable period but in some situations up to 12 months can be considered reasonable also.
It is often suggested that such restrictions are a “restraint of trade” or “aren’t worth the paper they are written on”. Both these suggestions are wrong. You just need to look at the raft of court cases involving injunctions by employers against former executives to see that. An employer is entitled to take reasonable steps to protect their legitimate business interests. But the law surrounding restrictive covenants and confidential information is complex and therefore executives would be advised to seek specialist legal advice.
The perfect time to consider such matters is on entry into a business when there is significant goodwill and enthusiasm floating around the potential appointment of the executive. It is sensible for executives to have such restrictions reviewed at point of entry to ensure that they are reasonable and where possible to try and draft more ‘relaxed’ restrictions. This can usually be combined with a wider review of a new service agreement or contract to check other key terms such as:-
- Exit provisions – notice, garden leave, pay in lieu of notice;
- ‘Time and attention’ provisions (what other activities can the executive do whilst in employment);
- Share incentive plans;
- Benefits including company car;
- Intellectual Property provisions;
- Powers of attorney that may be incorporated into the agreement.
The most concerning restrictive covenant that is perhaps overlooked upon entry are non-compete restrictions which could prevent an executive from working in the same sector for a specific period of time. Whilst there would be arguments that such restrictions may not be enforceable, it is nonetheless a headache that an Executive would prefer to avoid.
In some service agreements there is a specific provision for the executive to take independent legal advice and in some instances, companies will pay for the legal fees.
If not reviewed carefully upon entry, then it will certainly be the case that both the company and the executive will be reviewing matters upon exit. Even if the executive’s departure is amicable and without a compromise agreement, restrictions will still bite, and it is often peace of mind for the executive to get advice on the risks of taking their next career move and the enforceability of restrictions
The law surrounding restrictive covenants is complex but also carries with it high risk as the consequences of getting it wrong can result in expensive legal proceedings. We are able to advise on the enforceability of restrictive covenants including related confidential information restrictions. We can represent executives in negotiating a release or relaxation of existing restrictions or represent them if faced with threatened legal action from a former employer.
The employment team at MKB Law have significant experience in dealing with such issues for executives from SME’s up to PLC board level – please contact us to discuss any of the points mentioned in this article.