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27 April 2016
In many civil law countries – France, Germany, Spain and Italy to name but a few – it is both normal and indeed a legal necessity to pay for restrictive covenants, such as non-compete, non-solicit and non-dealing clauses, during the term for which they are in force. This has never been the case in the United Kingdom and other common law jurisdictions, where the test has always been whether an employer can demonstrate that it had a legitimate business interest justifying the imposition of the restriction. For some time, however, there has been debate about whether the United Kingdom might one day converge towards the continental norm. The High Court has now confirmed that the answer remains a resounding "no". It has also issued (yet another) reminder about the need for good drafting, and for covenants to be kept fresh.
In Bartholomews Agri Food Limited v Thornton a six-month post-termination restriction on working for a competitor or supplying goods and services to customers in competition with the employer in a certain geographical area contained the unusual statement that if the employer sought to enforce it, "the employee's full benefits will be paid". Did this make any difference to enforceability? Not at all, according to the court, which stated that "it is contrary to public policy in effect to permit an employer to purchase a restraint".
The employer could easily have achieved the end result that it sought had the six-month post-termination restraint combined with pay instead been a six-month garden leave clause – the crucial difference being that an individual on garden leave remains an employee and subject to all of the rights and obligations contained in his or her employment contract (other than the obligation to work). While the public policy arguments against restraints of trade will still be engaged if a garden leave clause is excessively long, the employer is not held to the same standard as with a post-termination covenant. Similarly, a deferred compensation scheme under which the compensation would be forfeited if the employee engaged in competitive activities could also be enforceable, albeit that it might not have served as much of a deterrent in this case.
Might an employer nevertheless still want to pay for covenants in some cases? Practically, payment may make an employee more likely to comply, even if Bartholomews is a reminder that it is unlikely to make any legal difference if the covenants are not enforceable on their face. Additionally, employers are increasingly faced with the practical problem of cross-border competitive threats – for example, if an employer wants a court in Paris to enforce an English injunction (as opposed to simply relying on the employee's unwillingness to place himself or herself in contempt of the English court), might the employer place itself in a better position by demonstrating a willingness to pay at least the minimum levels of compensation required under French law? This is a question without a clear answer, but one of increasing pertinence.
The case also highlighted two other points, neither of which are new but both of which are important and often forgotten:
For further information on this topic please contact Colin Leckey at Lewis Silkin by telephone (+44 20 7074 8000) or email (firstname.lastname@example.org). The Lewis Silkin website can be accessed at www.lewissilkinemployment.com/en-gb/.
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