It is little wonder that lawyers have a reputation for being pessimistic: you are holding an exciting new opportunity in your hands and we want to talk to you about putting you in the best position possible for your exit! We focus in on a number of aspects which may be key when your employment relationship ends, including, notice periods and clawbacks that might apply to sign on bonuses. Post-termination restrictive covenants are another crucial aspect of the offer to be considered.
At the very least, understanding how the restrictions applicable to you on a future exit will allow you to properly weigh up the offer being made; better still, there may be room to improve your position with respect to the scope of the restrictions.
With this in mind, we are taking a look at some key points to consider when negotiating post termination restrictions with a new employer.
Your potential new employer will only be able to enforce restrictions which are designed to protect its legitimate proprietary interests. These may include preserving the company’s trade connections (eg customers, clients or suppliers), protecting its trade secrets and confidential information and maintaining the stability of the workforce. At an executive level there is, of course, a high likelihood that you will have access to significant confidential information and potentially exercise significant sway over other key employees. It is not a given, however, that you are front office facing; are customer related restrictions therefore appropriate in your role?
Be aware too that whilst you may have risen to the C-suite by the time you are looking at exit, the enforceability of restrictions which apply to you at the point of your departure will be judged as at the date they were entered into. In order to be enforceable, the restriction must go no further than is reasonably necessary to protect the business (having regard to the interests of the parties and the public interest). If the restrictions go beyond what was reasonable in respect of the role you held at the time of entering into the agreement, an employer cannot try to justify the restrictions in the future by relying on the fact that you have risen through the ranks and become a member of senior management.
It would be wrong, however, to start from the assumption that the restrictions in your contract are unenforceable. It has become far rarer in our experience to see flagrantly unenforceable restrictive covenants being proposed in new contracts. Moreover, relying on the likely unenforceability of a covenant as comfort that a dispute will not arise in the future is unwise given the many examples we see of employers relying on covenants which have plain defects in order to threaten litigation, thereby acting as a deterrent to the departing executive or to achieve some form of commercial deal on exit.
Given the significant costs associated with litigating restrictive covenants, it is key for you to understand what you are agreeing to and if at all possible to negotiate them at the outset in order to reduce the impact on your potential career plans on termination.
Our top tips
1. A non-compete: is this necessary?
A non-compete obligation does what it says on the tin: you cannot for a period of time take up employment with a competitor. Further, and much to the horror of some clients, you will (other than in a tiny minority of contracts) not be paid for the duration of the non-compete period. The position in the UK, albeit the subject of an announced reform (see our previous article on this here), is that a non-compete of up to 12 months’ may be enforceable. With that said, a non-compete is understandably viewed by the Courts as being the most draconian of all restrictions and consequently the justification for its necessity (which is generally primarily the protection of confidential information), as well as its scope, will be heavily scrutinised.
We regularly see non-compete obligations of 12 months’ duration and where removal of the non-compete altogether is not an option, we will want to consider whether that period can be reduced. Duration is of course only one factor and it is equally important to look at precisely what you will be prohibited from doing / or with whom you will be prevented from working during the non-compete. In this regard you should consider carefully how the defined terms operate – the clause may be focused on which businesses you are prevented from joining (eg by way of a “Competing Business” type definition) or by reference to the work you are prohibited from carrying out (a “Restricted Business” type definition). Depending on your industry and role, you should consider whether a list of competitors can be drawn up or whether the definitions can be tightened to narrow the scope of the non-compete.
A range of factors will of course influence how far the employer may be willing to negotiate on the non-compete. This will include what is standard in your industry, as well as within the organisation itself, the level of your seniority and the perceived threat you will pose to the business if you jump ship. Factors outside of your control, for example whether the business has been burnt recently by senior exits to competitors, may also play a role. Ultimately much will come down to your commercial leverage.
2. The length of the restricted period / set off
Across all of the covenants, the first point you will want to consider is the length of a restriction and whether there is scope to reduce the duration. If you are in a client facing role, restrictions pertaining to solicitation and non-dealing with clients should be your focus and those restrictions that relate to solicitation of your future colleagues may be far less important.
It is common for the period that you are subject to the restrictive covenant post-termination to be reduced by any time you spend on garden leave immediately prior to the termination date. If they are not offset by any period of garden leave, we would recommend that you try to negotiate this. This will not benefit you in every scenario on termination as your new employer could require you to work your notice period or pay you in lieu of your notice and then you would be subject to the full length of the restriction post termination.
3. The devil is in the detail: defined terms
Consider the definitions used within the post-termination restrictions and the “look back periods”. As an executive, you generally want the definitions used in the post-termination restrictions to be tightly drafted so you know exactly what it means and it is as narrow as possible.
When negotiating you should be considering the scope, for instance, of the definition of “Customer” and / or “Prospective Customer” to consider whether it is too broad for your role and whether it is clear who falls within that category. In addition, the definitions will often specify a period of time looking back from the termination date or commencement of a garden leave period that the parties need to consider when deciding which clients, for instance, an employee cannot deal with or solicit for a period after termination. For example, an executive might be restricted from soliciting clients who they have personally dealt with or held confidential information about within the last 12 months prior to termination. This period of time is often referred to as a “look back” period and you should consider whether to negotiate this aspect of the restrictions to narrow those that fall within the definition. In terms of non-poaching restrictions, you would want to make sure that any definitions in respect of employees are limited to pivotal and senior employees who you have actually managed for a certain period prior to termination or those you had material dealings with.
In respect of garden leave clauses more generally, be prepared that most such clauses will provide only for you to receive your base salary. Where your total remuneration is heavily weighted towards bonuses or made up of commission or allowances, think carefully about long notice periods. Although garden leave provisions are not post-termination restraints – you remain employed – you may find yourself locked out of the market whilst earning a fraction of your normal “pay” and since you are not permitted to work at all during that time (even for a non-competitor), can prove to be even more restrictive than a non-compete.
4. Consider carve outs from the non-solicit and non-deal restrictions
It may be that your clients and network is the key reason your employer wants to hire you and consideration should be given to whether it is appropriate for certain carve outs to be agreed in relation to your non-solicit and non-dealing obligations. Depending on the industry in which you work, the level of new client business you may be introducing to your new employer and the history of your professional relationship with the client/s in question, a blanket carve out might be achievable. In the alternative, your new employer may agree to a time limited carve out for an agreed list of names (for example agreeing to disapply your restrictions in respect of named clients for 24 months from your joining).
5. Check whether there are any restrictions in any equity or incentive documents you are being offered
Restrictive covenants aren’t just found in employment contracts. Employers may also include them in equity agreements or incentive agreements. In the context of employment contracts, as outlined above, a court will look carefully at the restrictions and the interests of the parties given the accepted imbalance of bargaining power between an employer and employee. However, case law has shown that the courts apply a lower degree of scrutiny of restrictions found in commercial contracts (which would include equity and incentive documents) and the courts have been prepared to accept the enforceability of more onerous obligations (including longer restraint periods) than they would in the context of employment contracts.
We have advised countless executives who, for whatever reason, did not prioritise the negotiation of the post-termination restrictions on entry and, subsequently, want to re-negotiate these on exit or inadvertently breach the agreed restrictions as they haven’t referred back to their employment contract or equity documentation. Re-negotiating a position that was previous accepted by both parties obviously puts senior executives on the backfoot. Given there is so much at stake, in terms of future career and livelihood, it is crucial to attempt to get the restrictions right at the outset, rather than simply rushing into a new employment relationship.
Our market-leading senior executive team frequently assists clients negotiating post-termination restrictions, both on entry and on exit. We also regularly advise senior executives where they have been accused of breaching their post-termination restrictions by their former employer. Our clients include public company directors, founders, directors of private companies (often in private equity backed businesses), bankers, other professionals in financial services and other C-suite executives across industries. There is no one-size fits all approach to our advice. We offer personalised, tailored advice to our clients based on decades of experience acting for the most senior individuals within corporates across many different sectors. For more information view our senior executive brochure here.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2023