Non-compete clause declared reasonable despite lack of set-off during garden leave

Non-compete clause declared reasonable despite lack of set-off during garden leave

Non-compete clause declared reasonable despite lack of set-off during garden leave

In the recent case of Square Global Limited v Leonard, the High Court has held that the absence of a garden leave set-off clause in an employment contract does not automatically make any non-compete clauses unreasonable.

 

Background

After an employee has handed in their notice, it is common for employers to off-set any time that the employee spends on garden leave with the length of time they would be expected to adhere to any post-termination restrictive covenants (e.g. a non-compete clause). This would mean that an employee with a six-month post-termination restriction could have this time reduced by half if they were to spend three months on garden leave. 

Facts

Mr Leonard, who had been employed as a broker by Square Global Limited for four years, had a six-month post-termination restriction preventing competitive employment as well as a provision for garden leave, although without a set-off clause. In November 2019, he terminated his employment with immediate effect citing constructive dismissal and went to work for a competitor, with whom he had been in discussions for seven months.

Square Global Limited brought a claim and sought:

(a) a declaration that Mr Leonard was bound by his six-month notice period;
(b) an injunction to enforce his post-termination restrictions including a six-month non-compete clause; and
(c) damages in relation to Mr Leonard’s refusal to attend work.

In response, Mr Leonard brought a counterclaim for constructive dismissal and disputed the enforceability of the restrictions.

Decision

The High Court found in favour of Square Global Limited and held Mr Leonard to his notice period. The Court also concluded that Square Global Limited was entitled to an order enforcing the six-month non-compete restriction, despite there being no requirement in the contract for the length of the restriction to be off-set against any period of time spent on garden leave. The Court held that the garden leave clause in Mr Leonard’s contract existed to cater, among other matters, for a situation where Square Global Limited had concerns about Mr Leonard’s conduct (e.g. harvesting client information, or engaging in deceptive behaviour), and so gave Square Global Limited the option to restrict Mr Leonard’s duties during his notice period. In the Court’s view, if such concerns have a reasonable foundation, it would not then be unreasonable to enforce the full period of the post-termination restrictions.

The Court was found that the six-month non-compete restriction was reasonable, and that it went no further than necessary to protect Square Global Limited's legitimate business interests. Of relevance to the Court was that both Mr Leonard’s previous employment contract and his new employment contract with the competitor also contained six-month non-compete clauses; and that Mr Leonard had negotiated his employment contract with Square Global Limited.

The damages are due to be considered at a separate hearing.

Comment

Employers may find this judgment helpful if seeking to maximise the length of time during which they seek to restrict the activities of departing employees. The judgment also indicates that previous employment contracts may be taken into account when considering whether or not restrictive covenants are enforceable.

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