What does Restriction mean?
Restriction on trade is not a legal right nor can you contract an employee to commit to terms that prevents them from working for a competitor because you want “your cake and to eat it”.
Simply saying I don’t want them selling products that I sell or working for a competitor is not enough.
You need to have something to protect, you need to be able to say the information or trade secret(s) are your intellectual property such as software or unique methods of delivery that are not easy come by or you have invested in the development of.
Before applying such terms in a contract of employment you need to understand the ground rules.
Legal principles of restraints within contractual agreements
Bear in mind to interfere in the freedom to trade or to earn a livelihood is contrary to public policy and legally void. To seek an exception there must be a need for such restraint and you must show what you are trying to restrain. You must provide proofs of the interests sought to be protected and the general interest of the public.
The employer can not restrict the employee forever. Typically, an employer can impose 6- or 12-months limit. Ultimately:
- Any restraint must be fair, reasonable, necessary and in the public interest.
- The enforceability of the restraint is to be judged by reference to what the employee agreed in the contract not to do, rather than what he proposes to do, after his employment ends.
The types of restrictive agreements ESA is asked for mostly are in the areas of: sales, senior management and IT. These are seen as risk sectors. The issues with them often lay dormant until termination, then employers seek to have a restriction retrospectively inserted into settlement or termination agreements.
Sales: The restriction should be limited to soliciting the employer’s customers/clients, the terms should be maximum of 12 months and the geography should be the area where the person worked. The actual wording of the restriction should be managed by HR or a solicitor or at least looked over.
Where you are trying to include a restriction post the contract of employment or termination by way of a settlement agreement, this will cost you. So, most settlement agreements are arrived at at the end of negotiations, termination by way of dismissal, redundancy etc. and within the terms of the sum agreed will reference “in full and final.” Some employers will ask for a restrictive clause, but will only want to pay a statutory redundancy sum or a sum that is due anyway by entitlements. This will not work. The principles of contract require inter alia: offer, acceptance and consideration and that consideration must be above any statutory entitlement. So if the employee is entitled to say €5,000.00 anyway, you will need to put a sum on top of that to bind the employee to clauses such as restrictions.
You can put in such terms to include:
… It is an expressed condition of your employment that you agree not to reveal, publish or disclose to any person or association or company any confidential information during your employment or for a period of 12 months after leaving the Company. Confidential Information includes prices or price lists, sales methods, promotion, names of client, or any other business information that you aware of during your employment or thereafter.
During your employment you shall not engage in any business activity that conflicts in anyway whatsoever with your employment in this company. The company considers any breach of proper business conduct in the area of competition as gross misconduct and if you are found guilty of such breaches you will be dismissed without pay.
It is an express condition of your employment that for a period of 12 months following the termination of your employment, however so occurred, that you adhere to the following;
You shall not engage in any competitive activity within a 5-mile area of the Company nor shall you divulge any intellectual knowledge or secrets that could have a diverse effect on our Company’s position in the marketplace…
Again, you need to take advice on such clauses to ensure they are legally compliant.
The level of restrictive clauses becomes complex the more senior the role such as Directors or types of systems used.
The Courts however will look at any application by a Plaintiff who asserts that the restrictions are oppressive or unduly unnecessary.
In the case of Ryanair DAC v Peter Bellew [2019] IEHC 907 the Plaintiff Ryanair DAC sought the intervention of the Courts when their employee Mr. Bellew resigned to work in a competitor’s business. It should be noted that the Defendant had signed a restrictive agreement.
Nonetheless, when Ryanair commenced High Court proceedings against Mr Bellew seeking:
(a) an order to enforce the post termination restrictions entered into by Mr Bellew on 15 June 2018; and
(b) an injunction prohibiting Mr Bellew from commencing employment with easyJet for a period of 12 months post termination of his employment with Ryanair.
The Court delivered a different outcome from what we all had come to expect.
The Judge held that Ryanair had demonstrated that it had a legitimate interest in seeking to protect the valuable sensitive and confidential information that came to Mr Bellew’s knowledge in the course of his employment. However, he held this legitimate interest only extended to airlines that Ryanair was in competition within the low cost or low fare sector.
That it did not extend to all airlines, including those operating in the flag or high cost sector. Therefore it was held that the restriction sought to prevent the Defendant from taking up any position with any airline in any capacity was wholly or partly in competition with Plaintiffs business but it was far too wide and was therefore void and unenforceable as an unjustified restraint of trade.
Therefore, any restriction should be fair, and it was deemed that the 12 month restriction was justified given the nature of the confidential information that was within Defendants knowledge. Nonetheless, 6 months is normal and the Court did not however that restraint of trade clauses for a period in excess of 6 months can be difficult to uphold except in the case of very senior employees who have specialist experience, knowledge and connections as was the case with Mr Bellew the Plaintiff.
Further, the Court did suggest that the Court is to assess the justification for, and the reasonableness of, a restraint of trade clause is the date upon which it is actually entered into. It is therefore most important that a regular review of the restraint of trade clause is undertaken, particularly when a business expands or when employees are being promoted or moved to a new role, to ensure that the restraint is still appropriate and fit for purpose.
So, if you have a business that is at risk of an employee leaving and setting up their own business or going to work for a competitor, which could result in damage to your business, you will need to include restrictive clauses into your contracts. However, you need to be reasonable and know the limits to which you can impose such restrictions. Protecting your intellectual property and trade secrets is a right, but the employee has rights, such as the right to earn a living.
Duration, geographical region, grounds supporting what is protected, presented in the contract of employment before the employee starts alongside consistent reviews are all elements that must be considered.