Category Archives: Insight Article

In Quilter v Falconer, the High Court found that the post-termination restrictions clauses contained in Falconer’s employment contract were an unreasonable restraint on trade and therefore void and unenforceable.

What are post-termination restrictions clauses?

Post-termination restrictions clauses (PTRs) are often referred to as restrictive covenants and are the non-solicitation, non-compete, and non-dealing clauses contained in an employment contract.

Background

In 2019, Falconer joined Quilter as a financial adviser and was unhappy with her employment, citing her dissatisfaction with the administrative support she was receiving and the restriction on the products she could recommend to clients. She resigned during her 6-month probationary period, serving her two-week notice period on garden leave.

Falconer then began working for one of Quilter’s competitors as a self-employed financial adviser, in breach of the PTRs contained in her employment contract with Quilter.

Quilter brought a breach of contract claim against Falconer and sought an interim injunction to enforce the restrictive covenants in her employment contract. Quilter also alleged that Falconer had not devoted her whole time and attention to her work and that she had taken confidential information, contacted clients during her garden leave, and breached her duty of fidelity.

Whilst the interim injunction was granted, by the time the case came to trial the covenants in question had already expired leaving only the issue of assessing damages and costs.

The High Court’s decision

The Court held that the non-compete, non-solicitation, and non-dealing clauses in Falconer’s employment contract were invalid under the restraint of trade doctrine. The Court held that had the clauses been valid then Falconer would have breached her employment contract by, amongst other things:

1. contacting Quilter’s clients during her garden leave without permission
2. attending an induction course for her new employer whilst still being employed by Quilter
3. failing to show her new employer the restrictive covenants contained in her contract, despite an express clause requiring her to do so; and
4. scanning confidential client documents to divert business away from Quilter.

Quilter had legitimate business interests which it sought to protect by the post-termination restrictions.

The Court, however, held that Quilter was obliged to assess the reasonableness of any clause at the time it was entered into and that the burden of proving whether a clause is indeed reasonable lies with the employer. Quilter could not evidence the reasonableness of such clauses.

The non-compete clause

In Falconer’s contract, the nine-month non-compete clause applied regardless of how long she had worked for Quilter. During Falconer’s probationary period, she could be dismissed with two weeks’ notice and therefore it was reasonably foreseeable that Falconer could be employed for a very short period, whilst still being restricted by the nine-month non-compete clause.

The Court held that the length of the period of notice can be an indication of the unreasonableness of the duration of the restraint. Such a short notice period indicates the employee’s services are less valuable to the employer and therefore in need of less protection. As such, it was an unreasonable clause.

Further, Falconer was restricted from working with clients who had ever been a client of Quilter. The Court rejected this clause on the basis that it went further than protecting confidential information by seeking to prevent competition.

The Court noted that the Head of Quilter, who had access to much more confidential information, was only subject to a six-month restriction. Quilter offered no evidence to justify imposing the same or, as is the case here, longer restraints on a junior employee thus indicating that Quilter had adopted a ‘one size fits all’ approach and was failing to consider the suitability of restrictions for each level of employee.

The Court’s preference would be for Quilter to have protected its interests by using an appropriately worded non-dealing clause. The Court doubted the necessity of the non-compete clause, given the evidence at trial also suggested that non-compete clauses are not common practice for financial advisers. Once Quilter was aware of Falconer’s new employment it decided to wait five months before seeking to enforce the non-compete clause which suggests it was content with the protections afforded under the non-dealing and non-solicitation clauses.

The non-dealing and non-solicitation clauses

Both clauses were similar in scope in that they were to last for 12 months from termination and sought to prevent Falconer from supplying financial services to any customer of Quilter who had been a client during the 18 months before the termination date. This 18-month “backstop” was the central issue for the Court. The wording of the clause was such that Falconer would be prevented from soliciting or dealing with anyone within the book of clients she had taken over, even if she had not met or spoken to them, as the wording would capture all such clients. It would prevent Falconer from even dealing with her family and friends.

In the absence of evidence from Quilter as to why such clauses were reasonable, the Court held that these PTRs went further than necessary and that the 18-month backstop, together with a 12-month restriction, was excessive for a junior employee.

Noteworthy is that Quilter’s monetary claim amounted to £39,000, yet by trial, its costs had reached £500,000, with Falconer having to act as a litigant in person due to a lack of funds. Those representing Quilter candidly admitted that the case had proceeded to trial based largely on a dispute as to who would pay the costs. Whilst the trial dealt with liability and injunctive relief only, Mr. Justice Calver did remark that “…it is highly regrettable, and to nobody’s credit, that the parties failed to settle this case at mediation in January 2020 and instead chose to occupy the court’s time fighting a full-blown trial“. Certainly words of warning for would-be litigants.

The takeaway lesson for employers

Employers should avoid using PTRs in a “one size fits all” manner and should instead consider the reasonableness against the employee’s role and level within the business.

To consider the reasonableness, and importantly, the enforceability of any PTR, employers should consider a range of different scenarios including, as was the case here, an employee leaving after a very short period of employment. It is arguably reasonable to enforce a 9-month restriction on an employee who has worked somewhere for a long time and developed longstanding relationships with clients, whereas it is clearly less likely when compared to a new starter, employed for a short period of time, who has not yet developed those client relationships.

Employers should consider limited PTRs that apply during an initial period, such as a probationary period, having regard to the employee’s exposure to clients, and provide for more stringent PTRs thereafter.

If you use template employment contracts that include PTRs, this judgment makes it abundantly clear that a “one size fits all” approach is not reasonable and could lead to clauses being unenforceable. Call Karen Cole today to review your existing and future employment contracts. Karen can also advise you on the reasonableness and enforceability of any PTRs.

Note: This article is not legal advice; it provides information of general interest about current legal issues.

Employment claims are complex, and there is little prospect of recovering the legal costs incurred in defending them. Awards to employees can often be substantial, so it’s therefore worth taking the time to get things right.

You must act fairly and reasonably while ensuring compliance with any relevant terms of the employment contract and likewise ensure that you do not discriminate unlawfully when you dismiss an employee.

What are the fair reasons for dismissal?

1. Conduct
2. Capability
3. Illegality
4. Redundancy
5. Some other substantial reason (SOSR)

SOSRs are a “catch-all ” category that captures any reasons that don’t fall within the other categories. For instance, they can cover scenarios with a personality clash or irretrievable breakdown in the working relationship.

Automatically unfair reasons for dismissal

• Pregnancy & maternity
• Family reasons
• Representation
• Trade union grounds
• Part-time and fixed-term employees
• Pay and working hours
• Pension scheme trustee
• Whistleblowing

Lawfully dismissing an employee with two or more years of service

The first hurdle is to ensure a fair reason for dismissal (as above). It’s vital you:

• adopt a fair procedure;
• act reasonably in treating the reason as a sufficient reason for dismissal;
• act in accordance with the employment contract;
• do not discriminate, and
• provide reasons for the dismissal in writing.

Guidance on the procedure for dismissal is set out in the ACAS Code of Practice.

Employees with less than two years of service

Generally, employees must have been employed for two years, known as the ‘qualifying period’, before they can bring a claim for unfair dismissal. As such, and with the correct legal advice, it can be relatively straightforward to lawfully dismiss an employee with less than two years’ service – if the reason for dismissal is not automatically unfair and/or discriminatory. Importantly, there is no qualifying period for either of these claims. You must take great care, as successful claims will be deemed unfair regardless of the employee’s length of service.

Discrimination and the protected characteristics under the Equality Act

• Age
• Disability
• Gender reassignment
• Pregnancy and maternity
• Race
• Religion or belief
• Sex
• Sexual orientation

There is no need to demonstrate that an employer acted unreasonably in any of these claims.

Time limits

Strict time limits preclude specific claims from being brought, with extensions being granted to employees when they begin the ACAS early conciliation process.

We can advise you of the relevant time limits depending on the stage of the potential claim. Regardless of its merits, the employee’s claim may be out of time. On occasion, an employee can obtain an extension of time by applying to the Employment Tribunal.

Contractual claims, also known as “wrongful dismissal claims”

Employees who are unable to claim unfair dismissal can still claim breach of contract (regardless of the length of the employment relationship) if you, as the employer, breach a term of the employment contract. For such claims, fairness is not an issue, and the remedy is limited to putting an employee in a position they would have been in if the employer had not breached the employment contract.

In any dismissal, it is crucial that you give notice or notice pay to the employee—unless it is a summary dismissal and all accrued but untaken holiday is accounted for as of the date of dismissal.

When to seek legal advice

You should seek legal advice as early as possible to protect your business from potential claims and stay on the right side of the law.

Some practical steps to avoid potential pitfalls

• Good and consistent record-keeping;
• regular employee appraisals;
• have a compliant grievance procedure in place;
• keep an up-to-date staff handbook which is accessible to staff;
• investigate claims fairly to avoid victimisation claims, and
• depending on what stage of the procedure you are at and the business’s exposure to risk, it may be both practical and commercial to come to a mutual settlement agreement to protect the business from future claims.

Whether you are looking to protect your business from claims, need assistance with a new or existing claim, or require a review of your current policies and procedures, speak to employment lawyer Karen Cole today.

Note: This is not legal advice; it provides information of general interest about current legal issues.

COVID-19 has caused unprecedented challenges for employers for several reasons. You may have furloughed many of your staff members. However, there is still a need to navigate holiday pay and leave entitlement. In this article, we look at how holiday entitlement and pay apply during the Coronavirus pandemic.

This guide is for employers with furloughed employees, and those with employees who have continued to work during this period.

Coronavirus and holiday entitlement

Most UK workers can take up to 5.6 weeks’ paid holiday per year, which is the statutory minimum. Many employees are entitled to more holiday when expressed in their employment contract. Workers can take the same amount of holiday, regardless of whether they are on sick leave, maternity leave, parental leave, or any other type of statutory leave, including furlough leave. It is important to note that there is no requirement for workers to take holiday while they are on sick leave.

Furloughed workers and holiday entitlement

Workers continue to accrue holiday while they are on furlough and may take holiday without affecting their furlough. If you require an employee to take some of their holiday entitlement while on furlough, it is important to consider whether the employee can relax and enjoy leisure time (the purpose of a holiday). The need to self-isolate, socially distance, or if an employee is sick, may prevent them from resting. This is a fundamental part of taking holidays from work. You must also comply with the Working Time Regulations 1998 by providing twice as much notice of the requirement for the worker to take holiday, as against the period of holiday which you wish them to take. For example, if you require a worker to take five days’ holiday, you must provide ten days’ notice.

Are furloughed workers entitled to bank holidays?

If a bank holiday falls within a period of furlough, and the worker would typically have been working on that date, the bank holiday will not affect furlough. However, if the employee would normally have had annual leave on that date, you have two options:

• the employee may take the bank holiday as annual leave; or
• defer the bank holiday to a later date.

How much holiday pay are workers entitled to?

A worker’s entitlement to holiday pay will depend on the number of hours they work and how you pay them for those hours. Holiday pay entitlement for employees, regardless of whether they are on furlough or continue to work, can be calculated using the standard Government guidance or may be prescribed by what has been set out in the employment contract.

Note on furloughed workers and holiday pay

It is essential that employers correctly calculate furloughed workers’ holiday pay entitlement. Employers should not simply pay employees the rate of pay they are receiving while on furlough. The only exception is if an employer has agreed to pay the employee their usual rate of pay while they are on furlough. If any of your furloughed workers take annual leave during their period of furlough, you should calculate the correct amount of holiday pay using the standard guidance.

If the amount owed is at a rate higher than the pay they receive while on furlough, you must pay the difference. Taking holiday will not affect the furlough period. You can claim the usual grant from the government to cover the cost of holiday pay for the relevant period.

For those taking benefit from the flexible furlough scheme (in place since 1 July 2020) it is important to exercise caution as returning to work part-time may affect the rate of holiday pay to which the worker is entitled to. Holidays taken during flexible furlough should be paid in accordance with the Working Time Regulations. Only part of that payment will be recoverable under the scheme.

For further information, call Karen Cole today.

Note: This is not legal advice; it provides information of general interest about current legal issues.

When an employee leaves, and there is a threat of commercially sensitive information about operations and customers being passed to a competitor, the non-compete/restrictive covenants in the employment contract are effectively the safety net in protecting know-how and business relationships.

A recent case heard in the High Court has shown that while the court will enforce non-compete clauses, restrictions must go no further than protecting legitimate business interests. It also highlighted the importance of being clear about any so-called ‘garden leave’ where employees work out their notice period at home.

In Square Global Limited v. Leonard, a broker was required to give six months’ written notice. The employment contract also contained a restriction on him working for a competitor for six months after the end of his employment. When he immediately handed in his notice and left to work for a competitor, his former employer relied on the employment contract. In response, the broker claimed he had been constructively dismissed, arguing that this released him from his obligation to give notice and the non-compete clause.

The High Court upheld the employer’s argument. It said that the six-month non-compete clause was reasonable and went no further than necessary to protect the employer’s legitimate business interests. It was, therefore, enforceable. The court also decided that the broker was required to serve out his six-month notice period on top of the six-month restriction, keeping him out of the market for a total of 12 months.

This compares with a case in 2014, Ashcourt Rowan Financial Planning Limited v Hall, where the High Court held that a restrictive covenant designed to prevent a former employee from working for a competitor for six months was unenforceable because the covenant was too widely drawn, going beyond protecting the legitimate business interests of the employer to be in restraint of trade. The High Court found that the covenant was not confined to what was reasonably necessary and covered indirect involvement without any obvious justification.

The law has always regarded a covenant ‘in restraint of trade’ as being void because an individual should be free to follow his trade and use his skills without undue interference. Such clauses are, therefore, only enforceable if they are strictly limited to what is necessary to protect a business.

Employment partner Karen Cole said:

“This is a reminder that employers need to ensure that non-compete clauses and other restrictive covenants are reasonable and focus on activities which would involve the employee directly competing with their old employer. Trying to do a catch-all is impossible to enforce.

Garden leave and how or when that might be offset should also be tackled. What’s important is that any restrictions are carefully drafted and checked at the outset.”

Contact employment partner Karen Cole today if you have an employment law query.

Note: This is not legal advice; it provides information of general interest about current legal issues.

TUPE (The Transfer of Undertakings (Protection of Employment) Regulations 2006) is designed to protect jobs and safeguard contractual terms for employees when a business transfers to new ownership or a contract is placed with a new service provider. While it has been clear that the new employer must not change terms to disadvantage an employee, the Employment Tribunal has ruled that changes made solely for the transfer should not benefit an employee either.

The case involved Lancer Property Asset Management, which provided estate management services to Berkeley Square Estate, who decided to move to a new service provider. As a result, the directors of Lancer were to become employees of the new provider, Astrea Asset Management Ltd, under the TUPE regulations.

In preparing for the transfer, the directors decided to award themselves a salary increase and generous new terms for bonus and termination payments, together with a 24-month notice period. The new employer disputed the terms, sacking two of the directors for gross misconduct and refusing to pay the enhanced benefits to the other directors. The resulting dispute ended up at the Employment Appeal Tribunal (EAT), with the directors arguing that the TUPE regulation regarding pre-transfer variations was for situations where the change was detrimental to the employee.

Employment partner Karen Cole explains:

“TUPE is about ensuring fairness and continuity, so it’s no surprise that anything that makes an employee worse off would not be allowed but being better off hasn’t been tested in this way before.

The EAT said that all contract variations which are connected to a transfer are void, whether they are detrimental to the employee, and the objective of TUPE is to protect, not enhance. The EAT also highlighted that no legitimate commercial purpose could be demonstrated for the changes, meaning they infringed the general abuse principle of EU law and were unenforceable.

Contact Karen Cole today for further advice and information on TUPE, whether you’re an employer or an employee.

Note: This is not legal advice; it provides information of general interest about current legal issues.