‘One-size-fits-all’ approach to covenants risky after Quilter

Out-Law News | 27 Apr 2021 | 10:02 am |

Chris Evans tells HRNews why a recent High Court decision has caused some employers to review their restrictive covenants

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  • Transcript

    Are the restrictive covenants in your employees’ contracts of employment enforceable? It is a fundamental question, obviously, and in light of recent case law it is one many employers are now reconsidering very carefully. If, like many, you apply a ‘one-size-fits-all’ approach to covenants you may need to think again. 

    This is an issue being actively discussed in employment circles after the recent High Court decision in Quilter v Falconer. The central issue was whether a number of post-termination restrictive covenants of different kinds were enforceable. A reminder, the law says they will be void as an unlawful restraint of trade unless they protect a legitimate proprietary business interest of the employer - such as trade connections or trade secrets - and they go no further than is reasonably necessary to protect the legitimate interest.. Importantly, the reasonableness of the covenant is assessed at the time it is entered into.

    The facts of this case briefly. Emma Falconer had recently started work as a financial adviser for Quilter. Her employment contract contained a nine-month non-compete clause and a 12 month non-solicitation and non-dealing clause. She was subject to a 6 month probationary period, during which either party could terminate her contract on 2 weeks' notice. Just before her probationary period ended she decided to leave Quilter to join a competitor, Continuum. Quilter brought a breach of contract claim against both Ms Falconer and Continuum. The High Court decided that all three of the covenants in the contract - the  non-compete, non-solicitation and non-dealing clauses - were an unlawful restraint of trade and so void and unenforceable. So, what are the implications of this decision for employers? We have been advising a number of clients on this ever since the Quilter ruling was handed down. One of the team advising is Chris Evans – I phoned Chris and put that question to him: 

    Chris Evans: “So the case causes some difficulties for employers, particularly around restrictive covenants, because what the decision effectively has said is that where you've got a probationary period in a contract then, because you can terminate on very short notice, it calls into question whether the length of the restriction that may apply after termination is appropriate. What it effectively does is calls into question whether you should have a full restriction in circumstances where there are probationary periods in a contract, for example. Now, most employers in their contracts will not have a differentiation in terms of length of restriction depending on the length of service of the employee and whilst I can see the court’s concerns in Quilter, in that an individual, for example, could be dismissed on two weeks’ notice and have a full restriction applied to them, it doesn't accord with what most employers do in terms of their restrictive covenants in their contracts and it begs the question as to what employers should be doing going forwards and there are a few options here. One is to see whether any other decision picks up on this and whether this is something that other courts, and tribunals will apply, i.e. that if you if you don't have a tapered system, then actually it could render the clause unenforceable, or to look to modify your restrictions going forward, be that having a tapered system, for example, a shorter restriction during an individual's notice period and a longer restriction once that individual has passed their probationary period. The other alternative would be to actually disapply the probationary period, so to recognise from day one that the individual will have confidential information, will start having contact with clients,  and on that basis a probationary period is not necessary and the benefits of having a covenant that you can rely on far outweigh the benefit, for example, of being able to dismiss on two weeks’ notice. Now, it does leave us in a rather unsatisfactory position in that it doesn't create a clear outcome for employers as to what they ought to be doing in order to ensure their covenants are enforceable but the underlying theme behind it is you need to ensure that you do have a real review as to whether there is a legitimate reason for having the length of restriction you do have, and ensuring that you can justify that and I would certainly encourage clients to do that thinking at the very outset in an employment relationship. So, identifying, you know, how long will it take, for example, an employee to get up to speed with confidential information and clients and how can we justify the length of restriction that's in place?”

    Joe Glavina: You mentioned a tapered approach, Chris. So why isn’t that the answer? So, you could have a clause which says ‘restriction X’ applies for the first 6 months, during the probationary period, then another is triggered automatically after another 6 months and so on. Could that work?” 

    Chris Evans: “You certainly could do it that way and it’s one option to try and get around the Quilter decision, get around the criticism that was levied in the judgement. My concern with that is what impact does that have on existing contracts that you have with your staff, for example, that don't have that tapering and don't have that staggering? Does it make it easier for an employee in the future to identify well actually know you've changed your restrictive covenants now and as a consequence of that, you know, you have recognised that something is wrong with the drafting in your old covenants and it could create a situation where employers are having to think well am I going to have to update all my covenants on all my contracts in order to ensure that they are enforceable going forward, which would be a huge administrative task. Equally, the tapering process may not work. You may have a situation where you do have a huge amount of confidential information which is given to an employee on day one and it is that information which could be used very successfully by an employee, if they move firms, for example., and what you wouldn't want to have is a situation of employees going into firms, having very short restrictions in the first few months, and using that purely just to gain that information then moving on either back to their previous firm or to a different firm. So, effectively going in, taking the information, recognising they've got a very short restriction, and then moving on using that information. It creates a huge problem for employers and I think the underlying message here is that when setting your time restrictions you do need to ensure from the start that you've given proper thought as to why it is reasonable and why it is necessary and provided you've done that, it will give you the best possible argument to say, well, actually, no, these restrictions are legitimate for the following reasons and it was actually a criticism in the Quilter decision that that analysis hadn't properly been done.”

    Joe Glavina: “So perhaps the message for HR here is, at the very least, make sure contracts get reviewed when people get promoted, especially to senior positions?”

    Chris Evans: “Absolutely, and if you do have staff who are promoted, or there are salary review processes, or bonus rounds, and actually you think well, we need to update our covenants, they haven't been looked at in a while, then they act as the perfect trigger point to thinking well let's just do that, let's revisit what restrictions our staff are under and consider actually for an individual who's been with the organisation say, 10 years, is it appropriate that actually we increase their restrictions, or widen them, or narrow them even, depending on what their their role is at the given time? The benefit of that is you'll have updated drafting, it will take into account case law which has developed over the last few years, and will give you the best possible opportunity to argue, if push comes to shove, that they are enforceable and, in the worst case scenario, that you need to apply for an injunction.”

    That case of Quilter is a High Court decision and represents the latest view from the courts on the reasonableness of non-compete clauses. Of course, the other side of this coin is what parliament might have to say about it and possible changes to the legislation You will be aware, no doubt, the government ran a consultation on this recently - ‘Measures to reform post-termination non-compete clauses in contracts of employment’. That closed on 26 February and we are waiting for the government’s response.  We’ve put a link to that, and to the High Court’s Quilter judgement, in the transcript of this programme. 

    LINKS
    - Link to case report: Quilter Private Client Advisers Limited v Falconer (High Court)
    - Link to government consultation: ‘Measures to reform post-termination non-compete clauses in contracts of employment’