Restrictive covenants, which seek to prevent an employee doing certain things for a period of time after their employment ends, are an important form of protection for an employer's business.
Examples include prohibitions on an employee working for a competitor (a 'non-compete' clause), soliciting or providing services to their former employer's clients ('non-solicit' and 'non-deal'), or employing their former employer's staff ('non-poach').
The enforceability of restrictive covenants is governed by the common law. There have been very few relevant cases in the Bermuda courts, which are likely to follow English law. In England, the standard position is that a restrictive covenant will be void for being in restraint of trade, unless the employer has a legitimate proprietary interest to protect and the scope of the covenant is no more than is reasonable to protect that interest.
This general position applies to all forms of post-termination restriction, but it is most difficult to justify a non-compete, as it effectively prevents an employee from pursuing their livelihood. In assessing the reasonableness of a non-compete restriction, a court will consider whether some lesser form of protection, such as a non-solicit covenant or a confidentiality clause, would give adequate protection. The employer would need to make a compelling case that a non-compete is necessary, for example due to the employee's access to highly-confidential or sensitive information, or their centrality to client relationships.
Some employers will choose to pay the employee during their non-compete period (this is quite common in the United States), but this fact alone is unlikely to mean that a court will enforce a restriction which it considers to be too broad.
Reasonableness is assessed at the time the contract is entered into, so a restriction that would be reasonable for a senior executive could be struck down if it was entered into when the executive was in a junior role which did not justify such an onerous restriction. For this reason, it is important to keep contractual restrictions under review at appropriate points, for example when an employee is promoted.
In general, a court will not re-write a restriction that it considers too broad. So, if a court considers that a 6 month non-compete is too long, it will strike the clause out rather than reducing the duration to that which it finds reasonable. Restrictions therefore require close consideration and careful drafting.
In relation to duration, the employer would need to be able to demonstrate why the length of the restriction, rather than some lesser period, is necessary. Its reasoning could, for instance, be linked to the 'shelf-life' of the confidential information to which the employee has access, or the regularity with which the employee interacts with clients.
Reasonableness is assessed not just by the duration of the restriction but by its overall scope; it may be the case that a well-drafted restriction of a longer duration is more likely to be upheld than a poorly-drafted restriction of a shorter duration.
Leaving aside duration, there are a number of other grounds on which courts commonly strike down covenants, which include:
- The scope of the business which the employee is prevented from operating in is not limited to only those parts of the former employer's business in which the employee has been materially involved or had access to confidential information;
- The customers which the employee is prevented from soliciting or dealing with are not limited only to those with whom he/she personally had material dealings;
- The staff members which the employee is prevented from poaching are not limited only to those for whom he/she had line management responsibility, or include staff in entry-level or administrative positions;
- The employee is prevented from working in a geographical area in which his/her former employer does not actually compete;
- The duration of the restriction is not reduced by any period of time the employee spends on 'garden leave'.
These are issues which an employer should be mindful of when drafting restrictive covenants in employment contracts.
While employers should ensure that they have well-drafted templates, it is important to consider tailoring the templates for each employee they hire. Of course, restrictive covenants are also a common point of negotiation with potential recruits.
This is a complex area of the law and it is recommended to seek legal advice when drafting contractual restrictions.
Originally published by The Bermuda Chamber Of Commerce Newsletter (Chamber Insider), December 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.