News & Views

business isn’t Business

For lawyers, words matter. A lot. And for good reason.

In a recent case in the High Court, Sherrards successfully defended a claim in which a former employer in the recruitment sector was trying to punish a former employee for having had dealings with one of its customers after the employee had left and joined a competitor.

Any terms in an employment contract which seek to restrain an employee from any form of post-termination activity (such as, for example, soliciting business from the employer’s clients) are generally void on public policy grounds – the general view being that individuals should be at liberty to earn a living free from restraint. However, some restrictions (known as “restrictive covenants”) will be enforceable, so long as they go no further than reasonably necessary for the protection of a legitimate business interest.

But what is clear beyond a shadow of a doubt is that employees cannot be prevented, after the termination of their employment, from doing something that they did not do before the termination. This was the issue before the High Court on this occasion.

In this case, the focus was on what was meant by the word “business” in a restrictive covenant in the employee’s employment contract. Did it mean “functional entity” or did it mean “activity”? The employer claimed that it meant “entity” as opposed to “activity”. This was fatal to the employer’s claim.

Crucially, whoever drafted the contract of employment failed to define the term “business” and, had he or she properly defined it, the case would likely never have gone anywhere near a courtroom. Had the term been defined, it would – as is customary – have been spelled with a capital “B” (“Business”).

The case was complex but the basic facts were:

  • The employer (“A”) specialised in recruitment in the financial services sector.
  • A was trying to establish a relationship with a new client, Company C (“C”). C operated in the insurance sector (that is, a sector in which A neither specialised nor operated).
  • Whilst working for A, the employee placed a candidate with C. The role was insurance-specific, and was a one-off placement. A did not otherwise engage in providing recruitment services into the insurance sector.
  • When she left A, the former employee joined a competitor (“B”), who operated in the financial services sector (and so was in that sense a competitor to A), but also the insurance sector. She had dealings with C on behalf of B, providing candidates for insurance-specific roles. The issue was whether this placed her in breach of her restrictive covenants to A. Was she prohibited from having dealings with C even if those dealings did not overlap with anything A did?
  • Because of A’s argument as to the meaning of “business” (they said it meant “entity” and not “activity”), it meant that the covenant would stop the employee from dealing with C, even providing insurance-specific recruitment services, simply because B (as an “entity”) competed to some extent with A.
  • So the fact that B was a competitor to A (because it also operated in the financial services sector) was irrelevant. Nor did it matter whether the services provided to C by the employee were insurance or financial services-specific.
  • What mattered was that the restrictive covenant A was trying to enforce would have stopped the employee from providing insurance-specific recruitment services to C, even though A did not engage in this sector at all and would not have had the slightest commercial interest in such prohibition.

The crucial issue, therefore, was that the restrictive covenant was too wide. It went further than reasonably necessary to protect A’s interests. It sought to prevent the employee from engaging in recruitment services into the insurance sector, even though that is not something A did at the time. A had no legitimate commercial interest in stopping its staff from providing insurance-specific recruitment services to its customers after they’d left A’s employment, regardless of whether they did so whilst working for a company that competed with A in another respect.

The Judge hearing the case concluded that the restrictive covenant in question was “manifestly too wide” and that the arguments advanced by A via its lawyers were simply “wrong”.

The lesson? Words matter, and nowhere more so than in a restrictive covenant in an employment contract. Had the word “business” been properly-defined, the case may well have turned out differently and the employer may well have had the benefit of the protection it wanted.

For more information please contact the recruitment team.

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