Q: “I want to offer a member of our marketing team a settlement agreement to leave but make sure he doesn’t take any of our customers. I’ve looked at his employment contract and there aren’t any restrictions preventing him from competing after his employment ends. I’ve also read the ACAS template settlement agreement but there doesn’t seem to be anything in there either that I can use to stop him competing. The employee has a three month notice entitlement in his contract. Any advice?”
Charles Millett, partner at law firm Morecrofts LLP answers…
It is perfectly acceptable to include in a settlement agreement terms that go beyond what is stated in the Acas template agreement. Post-termination restrictions and clauses dealing with garden leave during the notice period are examples of this.
However, there are a number of important points that employers need to consider and it is highly recommended that they obtain professional advice in drawing up the agreement.
Although post-termination restrictions can be enforceable, they must go no further than is absolutely necessary to protect the employer’s legitimate business interests. It is here where it becomes particularly crucial to have very tight wording in the clauses. Often if an employee is seeking to challenge the enforceability of a post-termination restriction, even after they have agreed to it, they will look to argue that the restriction goes beyond what is reasonably necessary.
The employer also needs to consider whether it is necessary to offer the employee a further financial incentive under the settlement agreement in return for the employee agreeing to the post-termination restrictions. A payment to an employee in return for the employee agreeing to post-termination restrictions will almost certainly be taxable, as it falls outside the statutory exemption that applies to termination payments. Advisors of employers and employees need to consider this when they are giving advice. There is always the danger that HMRC might seek to argue that part of the tax free severance payment actually relates to this kind of taxable payment unless an amount is allocated to the taxable element in the agreement.
Of course, including post-termination restrictions is one thing, enforcing them is another. It is invariably a costly exercise for all parties. The important point from the employer’s perspective is that restrictions are included that are capable of being enforced, as this should act as a strong deterrent to the employee.
Answer given on 2 October 2013 by Charles Millett, partner at Morecrofts LLP.
IMPORTANT: The contents of this page are for guidance only and do not constitute legal advice. You should consult a solicitor without delay if you require legal advice on a particular employment matter.