Worker status limits enforcement of restrictive covenants

Background

In AFH Independent Financial Services Ltd and another v Baker and another, the High Court considered several issues arising from a dispute between a financial services group and a self-employed independent financial adviser who left to join a competitor. The adviser challenged the enforceability of post-termination restrictive covenants, while the court also had to decide whether other companies within the group could enforce those covenants where they were not parties to the contract.

Decision

The court held that only the contracting company could enforce the restrictive covenants. Although the agreement purported to give each group company the benefit of the restrictions, the adviser qualified as a "worker" and section 6(3) of the Contracts (Rights of Third Parties) Act 1999 prevented third parties from enforcing the terms of her contract. The court also rejected an alternative argument that the covenants could be enforced through a trust of a promise.

Turning to the restrictions themselves, the court upheld a 12-month non-solicitation covenant, accepting that annual client review cycles meant a shorter restriction would not adequately protect the business. However, it found the corresponding non-dealing covenant to be an unreasonable restraint of trade. The employer's own evidence showed that clients generally remained with the firm unless actively solicited, meaning the non-solicitation covenant already provided sufficient protection. The court therefore concluded that the additional non-dealing restriction went further than was reasonably necessary.

Learning points

The decision highlights that contractual wording giving group companies the benefit of restrictive covenants may not enable those companies to enforce the restrictions where the individual is an employee or worker. Employers operating through group structures should ensure the contracting entity is able to protect the business interests the restrictions are intended to safeguard.

The judgment also reinforces the importance of tailoring each restrictive covenant to the legitimate business interest it is intended to protect. Employers should avoid assuming that a suite of standard restrictions will stand or fall together. Instead, each covenant should be capable of independent justification as no more than is reasonably necessary in the circumstances. 

For more information or advice, please get in touch with Ella Straker in our Employment team.