291: Is it enforceable?: Post-termination restrictive covenants in employment contracts for financial advisers

Post-termination restrictive covenants will only be enforceable if the restrictions go no further than is reasonably necessary to protect the employer’s legitimate business interests. In the recent case of Quilter Private Client Advisers Ltd v Falconer and Continuum (Financial Services) LLP, the High Court considered the enforceability of post-termination restrictions in an employee’s contract and whether non-compete, non-solicitation and non-dealing clauses were unreasonable and therefore void.

Ms Falconer was employed by Quilter Private Client Advisers (Quilter) as a financial adviser to take over a ready-made book of clients from a departing employee. Her contract of employment included restrictions on dealing with or soliciting Quilter’s clients for 12 months after termination, and a nine month non-compete clause. Ms Falconer was unhappy in her role and resigned during her six months’ probationary period. She was put on garden leave for her two weeks’ notice period. Shortly after her resignation, Ms Falconer started work at a competitor, Continuum (Financial Services) LLP, using confidential information on Quilter’s clients. She had also attended a Continuum induction course whilst still working for Quilter and contacted Quilter’s clients during her garden leave without permission.

The High Court upheld Quilter’s claims of breach of contract and misuse of confidential information. However, the Court held that Ms Falconer’s non-competition, non-solicitation and non-dealing clauses were wider than necessary to protect Quilter’s business interests and therefore unenforceable. Relevant factors included:

• the nine month non-compete restriction applied irrespective of the length of Ms Falconer’s employment. It was unreasonable to prevent her from being employed by a competitor for nine months when her employment with Quilter might have lasted only two weeks. Even during her six months’ probationary period, she was purportedly subject to a nine months’ restriction despite having had very little time to build client relationships;
• giving an employee a short notice period implies that the employee’s services are less valuable and therefore in less need of protection;
• the non-compete clauses were held to be broader than ‘industry standard’;
• it was unreasonable to prevent Ms Falconer competing with Quilter on a UK-wide basis, since the company’s legitimate interests only extended to clients in the region that she had covered;
• the non-dealing and non-solicitation clauses were unreasonable in that they covered anyone who had been a client of Quilter in the 18 months prior to termination (even prior to Ms Falconer’s employment) but had since moved elsewhere, as well as existing clients whom Ms Falconer had taken over from her predecessor but had never met;
• quilter failed to justify why employees more senior to Ms Falconer had the same or less onerous restrictions, suggesting that restrictions for more junior employees were wider than reasonably necessary; and
• a non-dealing covenant would have been adequate to protect Quilter’s business interests, particularly because Ms Falconer had been employed to take over a ready-made book of clients.

Restrictive covenants must be tailored to the duties and status of individual employees, rather than taking a ‘one size fits all’ approach as the employer in this case appeared to have done. Careful drafting is also essential because reasonableness will be assessed at the time covenants are entered into. This case suggests that employers should consider having shorter and less onerous covenants to apply in a probationary period, although this is not standard practice. In any event, regular reviews of restrictive covenants should be undertaken for all staff who work in critical areas of the business to ensure that they are relevant and appropriate. Even if restrictive covenants are unenforceable, however, employers can still rely on other express and implied contractual duties to protect confidentiality and other business interests.

The Government is currently consulting on measures to reform post-termination restrictive covenants with the aim of encouraging competition and entrepreneurship. There are two proposals: changing the law so that restrictive covenants are only enforceable if the employer continues to pay remuneration during the restricted period; and banning them altogether.