This post was written by Michael Smith, Amy Ferrington, Séverine Martel, Marie Brunot, Jan Weißgerber, Desmond Liaw, and Anita Wan.
In the UK, a contractual term restricting an employee's activities after termination of employment will be void for being in restraint of trade and contrary to public policy, unless the employer can show that:
- It has a legitimate proprietary interest that the term protects
- The scope and duration of the protection sought goes no further than is reasonable, having regard to the interests of the parties and the public interest
Post-termination restrictions in employment contracts will be subject to greater scrutiny by the courts, when assessing enforceability, than covenants in commercial contracts or other scenarios where the parties are deemed to be of more equal bargaining power (for instance, in the context of a share sale or in partnership agreements).
The current list of potential legitimate interests includes protecting trade connections with customers, trade secrets, and other confidential information; the stability of the workforce; and the goodwill in a business. Avoiding competition per se is not a legitimate interest. Enforceability is determined on a case-by-case basis, and what is enforceable will vary between employees, depending on their roles and seniority. Where a court deems that a restriction is too wide, it will likely declare it void in its entirety, unless a minor amendment (known as “blue pencilling”) would render it reasonable.
In France, post-termination restrictions are quite common in the employment contracts of employees who have valuable business connections, or access to confidential information, or who hold senior responsibilities or sensitive positions.
Under French law, employees are not bound by a post-termination non-competition obligation and can work for a competitor provided that they don’t act unfairly in doing so.
Therefore, to prevent an employee from working for a competitor, a post-contractual non-competition covenant has to be inserted in the employee’s employment contract.
In France, the validity of non-competition clauses is subject to the following requirements:
- That they are designed to protect the legitimate interest of the employer
- That they are limited in time and space
- That they do not prevent the employee from holding a position for which he is qualified
- That they provide for financial compensation in consideration for the performance of the non-competition obligation. The amount of the financial compensation is usually fixed by the applicable collective bargaining agreement or, if not, must be fixed in the employment contract. It usually ranges between 25% and 100% of the employee’s gross monthly salary to be paid during the application of the clause.
Non-solicitation and non-poaching clauses have to be limited in time (usually no more than two years), but there is no legal obligation to provide financial compensation for these clauses to be valid, except when their scope is very broad and they could be considered as non-competition clauses.
An employee can also be bound by a confidentiality obligation under which he undertakes to keep in the strictest confidence all information, knowledge and data concerning the company and its activities. This clause has also to be limited in time, at least up until the information concerned becomes public.
From a German employment law perspective, ‘post-termination restrictions’ basically refer to non-competition and confidentiality obligations.
German statutory law does not provide for a general post-termination non-compete obligation and thus employees, as a rule, are free to compete with former employers. German statutory law only stipulates a non-compete obligation during the term of the employment and a limited confidentiality obligation.
In order to prevent employees from joining a competitor, the employer has to agree on a post-contractual non-compete covenant with the employee. Unlike in other European countries, post-contractual non-compete covenants in Germany are subject to a number of mandatory requirements. It is important for employers to comply with these requirements as the non-compete otherwise may not be valid and in the end may be unenforceable.
German statutory law, among others, requires any post-contractual non-compete covenant to be in writing bearing original signatures. Furthermore, German law contains limits on the territorial application and covered area of business. It also stipulates that non-compete covenants may not exceed a period of two years. Additionally, a non-compete covenant is only valid if it provides for a compensation of at least 50% of the employee's most recent remuneration. This compensation has to be paid to the employee for every month of the agreed term of non-competition.
Contrary to a general post-contractual non-compete covenant, a mere post-contractual non-disclosure agreement and non-solicitation agreement is valid without compensation. However, the line between a non-disclosure, non-solicitation and non-competition covenant is a fine one.
In Hong Kong, there is no legislation governing the enforceability of post-termination restrictive covenants. As such, their enforceability will be determined by the Hong Kong courts in accordance with the principles that are well-established in common law.
The starting position is that all post-termination restrictive covenants are unenforceable as a matter of public policy. The courts will be prepared to enforce such covenants to the extent that (i) they are necessary to protect the legitimate interests of the employer, and (ii) they are reasonable in all the circumstances.
In assessing whether or not an employer has a legitimate interest to protect, the courts will consider the nature of the interest it is aiming to protect. For example, legitimate interests worthy of protection may include goodwill (e.g., customer connections), trade secrets, confidential information and workforce stability. Once a legitimate interest has been established, the employer must prove that the post-termination restrictive covenant only goes as far as reasonably necessary to protect that legitimate interest. Reasonableness is ordinarily considered by the courts in terms of (i) the scope of the activities restricted, (ii) the length of time of the restriction, and (iii) the geographical coverage of the restriction.
Evidently, there are no fixed guidelines to adhere to when drafting post-termination restrictive covenants. Their enforceability depends on, inter alia, the employee’s role and seniority, and whether the position requires that degree of restriction. The takeaway point is that extra care must be taken when drafting them, and they should always be tailored to the individual employee – after all, there is no “one size fits all” employment contract.