what employers must know about the fair credit reporting act · november 2011 what employers must...

NOVEMBER 2011

What Employers Must Know About The Fair Credit Reporting ActBy Greg S. Labate

Every employer must take the time to review and understand the complicated requirements of the federal Fair Credit Reporting Act (FCRA), 15 U.S.C. §§1681-1681u, et seq., when obtaining consumer reports and/or making employment decisions based on those reports. The FCRA requirements place substantial burdens on employers using consumer reporting agencies to perform credit and background checks of new and current employees.

When Does the FCRA Apply to an Employer?

When an employer obtains background information on an individual from a third party to make employment-related decisions, it must comply with the FCRA if the background information is either a “consumer report” or an “investigative consumer report” and the third party is a “consumer reporting agency.”

A “consumer report” is defined as any communication that contains information about an individual’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living. Although the FCRA does not give specific examples, some examples may include criminal background reports; workers’ compensation history and medical reports; motor vehicle reports; reference checks; verification of education, license or past employment; credit history reports; and general background reports.

A Publication of the Society for Human Resource Management

Legal Report

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How to Handle Noncompete Clauses in the EU

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An “investigative consumer report” is defined as any communication containing information about an individual’s character, general reputation, personal characteristics or mode of living that is obtained through personal interviews with neighbors, friends or associates of the individual. If a consumer report contains this type of information and the information is obtained through personal interviews with others, that portion of the consumer report is treated as an investigative consumer report.

A “consumer reporting agency” is defined as any person or entity who regularly engages in the practice of assembling or evaluating information on individuals for the purpose of

providing reports to third parties. According to this definition, the FCRA does not apply to an employer that conducts reference checks for itself. Thus, the FCRA is not implicated when the employer conducts, for its own use, reference checks with prior employers of an applicant or employee.

When May an Employer Obtain A Report under the FCRA?

The FCRA authorizes a consumer reporting agency to furnish reports for a limited number of permissible purposes. The FCRA also prohibits a person from obtaining or using a report for any purpose not authorized by the FCRA.

Relevant to an employer, a consumer reporting agency may furnish a report if it is:

■ In response to a court order or federal grand jury subpoena;

■ In accordance with the written instructions of the individual to whom it relates; or

■ Provided to a person who intends to use the information for employment purposes.

Thus, an employer may order and use reports obtained from a consumer reporting agency to make employment-related continued on page 3 ➤

‘ ‘The FCRA is not implicated when the employer conducts, for its own use, reference checks with prior employers of an applicant or employee.

decisions, such as hiring, promotion, reassignment or retention of an employee.

What Information Must Be Excluded from a Report?

An employer also should be aware that the FCRA imposes certain restrictions on the content of a consumer report or investigative consumer report. The following information may not be included or requested in a report:

■ Bankruptcies that are more than 10 years old.

■ Lawsuits and judgments that are more than seven years old.

■ Paid tax liens that are more than seven years old.

■ Accounts placed for collection or charged to profit and loss that are more than seven years old.

■ Records of arrest, indictment or criminal convictions that are more than seven years old.

■ Any other adverse information that is more than seven years old at the time the report is made.

However, these content and time restrictions do not apply if the report is to be used in connection with the employment of an individual whose annual salary will equal or is reasonably expected to equal $75,000 or more.

What Are the FCRA’s Procedural Requirements?

An employer that orders and uses a consumer report or investigative consumer report from a consumer reporting agency for employment purposes must comply with various procedural requirements. These requirements consist primarily of notice and disclosure to the individual and certification of compliance with the FCRA to the consumer reporting agency.

The procedural requirements for obtaining and using a consumer report and investigative consumer report are very similar but not identical. Because information provided in an investigative consumer report is obtained through personal interviews with associates of the individual, these reports are a greater intrusion into individual privacy. Thus, the FCRA imposes greater procedural requirements on employers that request and use an investigative consumer report. Following are the major procedural requirements an employer must comply with under the FCRA.

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Notice and DisclosurePrior to obtaining a report from a consumer reporting agency, an employer must provide the following notice and disclosure to the applicant or employee:

Initial notice and disclosure for a consumer report.

Before an employer orders a consumer report, the employer must notify the applicant or employee that it may obtain a consumer report on the individual for employment purposes. This initial notice and disclosure requirement for a consumer report must be made in writing in a separate document containing no other content and must be clear and conspicuous.

special notice and disclosure for an investigative

consumer report. An employer must specially notify an applicant or employee that it may obtain an investigative consumer report on the applicant or employee for employment purposes. The special notice and disclosure for the investigative consumer report must be:

■ Made no later than three days after the employer requests the investigative consumer report.

■ Made in writing.



■ Mailed or delivered to the applicant or employee in clear and accurate language.

The notice and disclosure must include the following:

■ A statement that the investigative consumer report may include information about the individual’s character, general reputation, personal characteristics or mode of living.

■ A statement advising the individual of his or her right to make a written request to the employer for a complete and accurate disclosure of the nature and scope of the investigation requested by the employer.

■ A statement that the employer is required to disclose the nature and scope of the investigation to the individual, in writing, within five days after the date the employer receives the individual’s request for disclosure or the date the employer requests the investigative consumer report, whichever is later.

■ A copy of the “summary of consumer rights.”

The FCRA also requires that the consumer reporting agency provide the employer with a copy of the summary of consumer rights at the time the report is furnished to the employer.


■ Will provide a copy of the summary of consumer rights to the applicant or employee before taking any adverse action.

■ Will not violate any federal or state equal employment opportunity laws in connection with its use of the report.

If an employer requests a report from a consumer reporting agency for a purpose that is not permitted by the FCRA, but represents to the consumer reporting agency that the report will

be used for a permissible purpose, the employer will be civilly liable to both the consumer reporting agency and the individual, and also may be subject to criminal penalties, for obtaining the information under false pretenses.

special Certification for an Investigative Consumer Report. Before an employer obtains an investigative consumer report, it must make a special certification to the consumer reporting agency, in addition to the above certification of use and legal compliance. This special certification must state that the employer:

■ Has provided the required investigative consumer report special notice and disclosure to the applicant or employee.

■ Will disclose the nature and scope of the investigation to the applicant or employee upon written request no later than five days after the date the employer receives the request or the date the employer first ordered the investigative consumer report, whichever is later.

While it is not clear whether the FCRA permits a general and continuing certification, it is clear that the FCRA imposes greater procedural requirements on the use of investigative consumer reports. Thus, it is recommended that the employer complete a certification each time it orders an investigative consumer report.


Written Consent From Applicant or Employee An employer must obtain written consent from the applicant or employee authorizing the employer to order a consumer report or investigative consumer report.

General consent. Before an employer requests a consumer report or an investigative consumer report, the applicant or employee must authorize the employer to obtain the consumer report or investigative consumer report by written consent.

Medical consent. If the report will include medical information, the applicant or employee must specifically consent to the inclusion of the medical information in the report. This consent must be in writing and must specifically authorize the employer to obtain medical information.

It is unclear under the FCRA whether a new consent or authorization must be obtained each time an employer wants to order a report on the applicant or employee. In 1998, the Federal Trade Commission (FTC) issued a nonbinding opinion letter that provided that employers need not “go through the disclosure/authorization process each time a report is requested.” Instead, the employer may “obtain a general or ‘blanket’ authorization from the consumer to obtain consumer reports at any time during the consumer’s tenure of employment.”

Nonetheless, it is recommended that if an employer uses a general consent or authorization form, the employer should make clear that it is a “continuing” consent or authorization. The consent or authorization form should state that it is a continuing consent and will remain valid until the applicant or employee revokes the consent in writing.

Certification of Compliance Before a consumer reporting agency may provide any information to an employer, the employer must provide initial certification of use and legal compliance. Special certification is required for an investigative consumer report.

Initial Certification of use and Legal Compliance. An employer must identify itself and certify the use of the report and legal compliance with the FCRA. The certification will require the employer to state the purpose, which must be permissible under the FCRA, for which the employer intends to use the report and to state that the employer:

■ Will not use the report for any other purpose.

■ Provided the required initial notice and disclosure to the applicant or employee.

‘ ‘An employer must identify itself and certify the use of the report and legal compliance with the FCRA.




What should the Employer Expect From the Consumer Reporting Agency?

An employer should expect the following when the consumer reporting agency provides the requested consumer report or investigative consumer report to the employer:

■ Summary of consumer rights. The consumer reporting agency must provide a written summary of the consumer’s rights at the time the consumer reporting agency gives the report to the employer.

■ Notice of user responsibilities. The consumer reporting agency must provide the employer with a notice of the employer’s responsibilities as a user of a consumer report or investigative consumer report under the FCRA.

What Procedural Requirements Must an Employer Follow Before Taking Adverse Action?

In addition to the notice, disclosure and certification an employer must make before obtaining a consumer report or investigative consumer report from a consumer reporting agency, an employer must comply with various procedural requirements when it actually uses the information provided in the report. Primarily, an employer must adhere to certain procedures when it takes “adverse action” based on a consumer report or investigative consumer report.

The FCRA defines “adverse action” as a denial of employment or any other decision for employment purposes that adversely

affects any current or prospective employee. This definition is extremely broad and could include decisions regarding promotion, demotion, suspension, reassignment, termination or retention of an employee, among other actions.

Disclosure of ReportBefore an employer may take adverse action against an applicant or employee that is based in whole or in part on a consumer report or investigative consumer report, it must provide the individual with a copy of the report and a copy of the individual’s summary of consumer rights.

Notice of Adverse ActionWhen an employer takes an adverse action against an applicant or employee that is based in whole or in part on a consumer report or investigative consumer report, it must provide the individual with notice of the adverse action. This notice may be verbal, written or electronic and must provide:

■ An explanation of the adverse action.

■ The name, address and telephone number of the consumer reporting agency (including the toll-free number for the consumer reporting agency if it operates on a nationwide basis) that provided the report.

■ A statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the individual the specific reasons why the adverse action was taken.

■ A statement that the individual has the right to request a free copy of the report from the consumer reporting agency within 60 days after the individual receives this notice.

■ A statement that the individual has the right to dispute with the consumer reporting agency the accuracy or completeness of any information in the report.

While the FCRA does not require this notice to be in writing, employers are advised to provide written notice anyway.

The report provided to the applicant or employee cannot be redacted in any way to conceal or remove information.



For this reason, employers should instruct any third-party agency that conducts background checks to prepare separate reports on each individual. The only report that should be given to an applicant or employee is the report that pertains solely to that person.

The FCRA does not specify how long an employer must wait after making the pre-adverse action disclosure before actually taking adverse action and mailing the post-adverse action disclosure. However, the purpose of the provision is to permit the individual an opportunity to correct any error in the report before adverse action is taken based on the information in the report. Additionally, at least one FTC opinion letter states that a waiting period of five business days was reasonable under the circumstances addressed in that letter. Based on this letter and the purposes of the FCRA, employers should generally wait at least five business days after sending the pre-adverse action disclosure before making an adverse decision and mailing the post-adverse action disclosure form.

Federal regulations also require employers to take appropriate measures to dispose of sensitive information derived from consumer reports.

Are There Exceptions to The FCRA’s Procedural Requirements?

As originally enacted, the FCRA did not contain an exception for investigations of employee misconduct. As a result, the FTC promulgated an interpretation that employers must comply with the FTC’s disclosure and authorization requirements prior to engaging in an investigation of employee misconduct. In response, Congress amended the FCRA in 2003 to address this issue; as a result, the FCRA now contains an exception for “communications … made to an employer in connection with an investigation of (1) suspected misconduct relating to employment; or (2) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any pre-existing written policies of the employer.”

In 2004, Congress amended the FCRA with the Fair and Accurate Credit Transactions Act (FACTA), which further addressed the issue of employee investigations. Specifically, FACTA excludes certain communications relating to investigations of employee misconduct from the definition of a consumer report. Consequently, FACTA amended the FCRA so that the FCRA exempts certain investigations of suspected wrongdoing from its typical notice and disclosure requirements. FACTA still requires that subsequent disclosure to the investigated party may need to be made when the investigation

was conducted by a consumer reporting agency. If an adverse action is taken as a result of the investigation of employee misconduct, the employer must make disclosures to the employee. An employer must disclose a summary of the nature and substance of communications related to the investigation of employee misconduct, but it need not disclose its sources of information.

What Are the Penalties For Violating the FCRA?

Employers that are “negligent in failing to comply” with the FCRA’s requirements are liable to a consumer for actual damages, costs of a suit and attorneys’ fees. In addition, if it is determined that an employer is in “willful noncompliance” of the FCRA, the employer may face punitive damages. Furthermore, criminal penalties also may be imposed if a person obtains a credit report under false pretenses. Finally, employers also must be concerned about class-action lawsuits by applicants or employees based on violations of the FCRA.

Due to the inherent risks and potential liability involved in navigating through the confusing regulations of the FCRA, employers are strongly advised to consult with experienced labor counsel before obtaining any consumer reports or taking any adverse actions based on any consumer reports. Employers should therefore analyze their policies to ensure that they are in full compliance with requirements of the FCRA.

Finally, the laws of individual states sometimes impose additional requirements on employers that obtain and use background reports for employment applicants. Because some states impose these additional requirements, employers also should review the law of each state in which they intend to use any consumer reports.

Greg S. Labate is a partner and co-chair of Sheppard Mullin’s Labor and Employment Practice Group, and is based in Orange County, Calif.

‘ ‘Employers should generally wait at least five business days after sending the pre-adverse action disclosure before making an adverse decision.


7 LegaL RepoRt NoVeMBeR 2011

How to Handle Noncompete Clauses in the EUBy Jonathan Hallows and the Meritas European Employment Group

In the global economy, it is common for businesses to have commercial interests in a number of jurisdictions. With it becoming increasingly easy for employees to move between these jurisdictions, businesses are faced with the prospect of trying to protect themselves against unfair competition in many different locations. This is especially true in the European Union (EU), where the principles of free movement of trade and goods and the freedom of establishment mean it is extremely easy for employees to move within the EU.

Businesses will often seek to have their employees agree to post-termination restrictions against competing with the employer for a period of time after employment has ended. However, the laws around such agreements often vary considerably between jurisdictions. If a business is to rely on this protection, it needs to know what restrictions are acceptable under the laws of a relevant jurisdiction and

what measures to take to ensure that those restrictions are enforceable.

Given the differences in the treatment of post-termination restrictive covenants, restrictions will often have to be tailored to the jurisdiction in which they must be enforced. To demonstrate how noncompete covenants are treated in various jurisdictions in Europe, we will review and compare the approaches taken in France, Germany, the Netherlands and the United Kingdom.

France

Anti-competitive provisions are subject to the French civil rules related to contractual relations that require performance of contracts in good faith, and to the Civil Code principle


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of freedom of contract. However, they are also subject to the provisions of national collective bargaining agreements applicable to a given sector of business activity (“conventions collectives nationales”) that improve employees’ rights by supplementing the Labor Code with additional or improved terms of employment.

The legal requirements are those of the national collective bargaining agreements and/or the conditions defined by case law, which provide that a noncompetition clause is lawful if it:

■ Is essential to the protection of the legitimate interests of the employer.

■ Is limited in time.

■ Is limited in space.

■ Takes into consideration the specificity of the work of the employee.

■ Includes an obligation for the employer to pay financial compensation.

In principle, in the event that post-termination anti-competitive provisions do not comply with these conditions of validity, the judge can decide that the clause is null and void, but only if the employee seeks such a decision. The clause can also be modified by the judge in order to comply with the conditions of validity, and case law suggests that a court will refuse to cancel excessive clauses where the employee has made a clear and blatant competitive act in breach of his or her obligations.

In the absence of any provision about a noncompetition clause in a national collective bargaining agreement, the French principle of freedom of contract allows the parties to agree to any other elements of an anti-competitive provision, provided that the five conditions above are satisfied and that the employee is remunerated during the period.

Where the contract contains a noncompetition clause,

the employer is required to pay financial compensation to the employee during the period of post-termination anti-competitive restriction. This remuneration cannot be increased or decreased by a judge. However, derisory financial compensation in a noncompetition clause is equivalent to an absence of compensation, and the clause will be held to be invalid. The remuneration is also due whatever the reason for the termination of the contract, unless the contract terminates because of the death of the employee. The national collective bargaining agreement or employment contract can provide that

the employer can unilaterally renounce the post-termination noncompetition clause. In that case, a time limit for the employer to give notice of renunciation also has to be provided. If the employer successfully renounces the clause, it will no longer be compelled to pay the financial compensation with the consequence that the employee will then be free to work where and with whom he or she pleases.

If the employer fails to pay the financial compensation, the employee will be freed from the noncompetition clause. The employee can bring an action against his or her employer in order to obtain the payment of this financial compensation for the period during which he or she has respected the noncompetition obligation, and to obtain damages due to noncompliance by the employer with the noncompetition clause.

The employee who breaches his or her obligations is no longer entitled to receive payment of the financial compensation and can be compelled to reimburse this to the former employer. Furthermore, the employee can be ordered to pay damages. If the noncompetition clause provides for liquidated damages (“clause pénale”), he or she will be ordered to pay the relevant amount or such other amount that the judge decides is appropriate. The employee can also be ordered to cease the competitive activity, with a fixed penalty if the order is not complied with.

‘ ‘If the employer fails to pay the financial compensation, the employee will be freed from the noncompetition clause.




In addition, an unfair competition action can be brought against the new employer when it knew the employee was subject to post-termination anti-competitive restrictions. The former employer can also take the new employer to court if the former employer is able to demonstrate that the employee was poached and/or hired while he or she was still working for it.

Germany

A post-termination noncompete agreement is defined as “any agreement between employer and employee that restricts the employee’s professional activities after the employment has ended.” The restriction may be limited to certain defined activities (e.g., not to sell certain products or services), or it may relate to competing enterprises (e.g., not to work for an enterprise that competes with the employer).

In German statutory law, the Commercial Code contains mandatory provisions. The employer and employee cannot depart from these provisions to the disadvantage of the employee. Under certain circumstances, members of the management of a company are not considered “employees” under German law; as a result, the provisions in the Commercial Code become nonmandatory. However, German courts have decided that noncompete agreements with unreasonable restrictions are ineffective. Therefore, the provisions in the Commercial Code set the general guidelines for noncompete agreements with management personnel. Due to the very strict German law, anti-competitive agreements should be drafted with great care, as any failure to comply with mandatory law renders the agreement nonbinding or ineffective.

Compliance with all legal requirements is of paramount importance for an anti-competitive agreement to be effective.

Noncompete agreements may be part of the original employment contract or may be set up as a separate agreement. A noncompete agreement must be in written form to be valid. This requires that the document of which the noncompete agreement is a part must be signed by the employer or by at least one officer who has the authority required to legally bind the employer. In addition, the employee must receive an original version of the noncompete agreement, duly signed by the employer.

The employer can enforce the noncompete agreement only if it undertook in the noncompete agreement to pay for the term of the restriction the statutory noncompete compensation of at least half of the employee’s most recent remuneration. All remuneration components must be considered when calculating the amount of the noncompete compensation. This includes cash and in-kind remuneration, fixed and variable components, and contractual and discretionary benefits. Variable remuneration components are averaged over the last three years. In-kind benefits will be translated into a corresponding cash value. For example, the cash value of the right to use a company car for private purposes will be equal to the monetary value attached to it for tax purposes.

In the case of noncompliance with statutory provisions, three consequences are possible:

■ The agreement can be null and void (e.g., no written form, no compensation, requesting word of honor).

■ The agreement can be nonbinding (e.g., compensation below threshold, no legitimate business interest, unduly hindering of career, conditional agreements).

■ The agreement can be partly nonbinding (e.g., scope of agreement with regard to business interest or career of employee is too broad).

Generally speaking, in the case of a null and void agreement, neither the employer nor the employee can rely on the agreement. In the case of a nonbinding agreement, the employee can decide if he or she wants to accept the agreement. In the case of a partly nonbinding agreement, the agreement remains effective in the scope given by the Commercial Code.

The employer has a statutory right to release the employee from the agreed restriction. The release is not subject to any specific requirements or reasons, but it must be given in writing and may not be declared once the employment has ended. The prohibition to compete expires immediately upon a declaration of release. The obligation of the employer to pay noncompete compensation after exercising its statutory right to




release the employee from the agreed restriction continues to remain in force for one year from the release once the employment has ended.

During any period of post-termination anti-competitive restriction, the employer is obliged to pay the agreed compensation to the employee. The compensation may be

paid either once or in monthly installments. The compensation payments can be reduced under certain circumstances if the employee receives remuneration from other employers, although the noncompete agreement should contain stipulations with regard to deduction of payments due to new earnings to avoid misunderstandings.

If the employer fails to pay compensation, an employee can claim the agreed compensation under the noncompetition agreement in the labor court. Moreover, the employee is entitled to a cancellation of the noncompete agreement if the employer defaults on its payments. In this case, the employee is no longer bound by the agreement and can claim damages.

If the employee acts in breach of a restriction, the employer can claim further information from its former employee. Moreover, it has a claim for injunctive relief, which it may enforce by way of judgment proceedings or, if it can establish the need for immediate relief to avoid direct and substantial harm to its business, by way of interlocutory injunction. The employer may also claim damages. It does not need to pay compensation to the employee as long as the violation continues, and it is entitled to cancel the agreement. Often, contractual penalties are agreed on in the case of a breach of the noncompete agreement.

The netherlands

The principal basis for a noncompetition provision is a written agreement between the employer and the employee. Therefore, pursuant to the law, a noncompetition provision is

not automatically in place. The Dutch Civil Code has provisions concerning the validity of noncompetition provisions and describing that such arrangements can be modified, or even annulled, by the court.

The judgment of the court is based on weighing the interests of the employer in protecting its legitimate business interests and the interests of the employee to be free in choosing his or her employment and employer. In general, public policy considerations are not of importance. The employer needs to

be able to demonstrate that it has a legitimate interest regarding the enforcement of the noncompetition provision. If it is able to do so, it will depend on the interests of the employee whether the court considers a modification or annulment appropriate. In addition, the court is authorized to grant financial compensation to an employee for the period that the employee is unable to earn income due to the noncompetition provision. However, it is important to note that such compensation rarely is awarded to employees.

The legal requirements are that the noncompetition provision needs to be agreed upon in writing. It must be clear that the employee agreed with this restriction. In addition, the scope of the provision needs to be clear regarding the area covered (the country/continent, etc.) and the restricted activities covered (e.g., all commercial activities in a certain branch or industry). It is also important that the duration of the restriction is explicitly stipulated. For senior employees, a duration of one



‘ ‘The employee is entitled to a cancellation of the noncompete agreement if the employer defaults on its payments.


year is generally considered to be the maximum period. There is no need to offer and/or pay the employee compensation for the period that the noncompetition provision will apply after the termination of the employment agreement. A few years ago, such obligatory financial compensation was discussed in Parliament (in the context of some amendments to the law), but all proposals were rejected. The court is allowed to award compensation to the employee in relation to the restrictions that arise from a noncompetition provision, but, in the event that the court refuses to suspend or modify the noncompetition restriction, it is uncommon that it makes use of this power.

Pursuant to the law, the employer does not owe any obligations to an employee during a period of post-termination anti-competitive restriction. However, such obligations (e.g., payment of compensation) could arise from the provision itself; when the parties agree, or the court rules, the employer should pay certain compensation during the restrictive period (which is uncommon).

Often, a penalty is included in the noncompetition provision. If the court holds that this provision is enforceable and that the employee is in breach of this clause, this penalty can be claimed. The courts are authorized to modify such penalties if they are considered disproportionate. If no penalty is included in the contract, the courts can also impose a default fine if the employee ignores the judgment of the court not to work for a certain employer before a certain date.

Because of the risks set out above, it is not uncommon for an employee to start preliminary relief proceedings in order to get a preliminary judgment on whether he or she can go to work for a specific company without being in violation of the noncompetition provision, or in order to suspend or modify it. In most cases, but certainly not always, the parties accept the preliminary court proceedings judgment as a final judgment.

The former employer can also inform the new employer that the employee is not allowed to work for the new employer pursuant to the noncompetition provision. Under some circumstances, it can be unlawful if the new employer offers work to the employee who is not allowed to work for it.

united Kingdom

The bases for anti-competition provisions in England and Wales arise out of contract, and there are virtually no statutes that govern this area. Under English law, there are a number

of duties implied by law into the employment relationship. One of these is that the employee has a “duty of fidelity and loyalty” toward the employer. An employee is therefore not permitted to compete with his or her employer during his or her employment. After the employment is over, employees are free to do as they wish, subject to a duty to keep an employer’s trade secrets confidential (a high test) and any contractual obligations agreed to by the parties.

Restrictions against free trade are usually considered unlawful and unenforceable except in a few areas, employment being one of them. Post-termination restrictive covenants are permitted, provided that the employer has a legitimate business interest that needs to be protected and that the post-termination anti-competitive provisions in question are a proportionate means of protecting that legitimate business interest.

Normal contractual formalities would have to be complied with, such as consideration for the obligation and sufficient certainty.

Usually, an employee will sign a contract of employment containing post-termination restrictive covenants upon appointment (which would be sufficient consideration). If

post-termination restrictive covenants are introduced during employment, these should be linked to a salary review or promotion or a fee for entering into the covenant; otherwise, the restriction may be invalid for lack of consideration.

There is no obligation for the employer to pay the employee during a period of restriction, nor is there any set maximum duration for any restrictive covenant (although, in our




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experience, restrictive covenants are more likely to be enforceable where the duration is three to 12 months). A longer restrictive covenant is less likely to be enforceable than a shorter restrictive covenant, and restrictive covenants are more likely to be enforceable against senior employees than junior employees.

To assess the enforceability of a restrictive covenant, one must consider all the factors and decide whether the covenant is a proportionate means of protecting a legitimate business interest. A narrow, well-defined clause is therefore likely to be more enforceable than a broad and vague clause.

Any obligations owed by the employer would depend on the contractual terms around the post-termination provisions and would be subject to agreement between the parties. There is no requirement that the employee should be paid during any period of restriction. If the employer were to breach the contract, then this would end any continuing obligation on the employee’s part.

In the event that the employee breaches his or her obligations, the principal remedies available are a claim for damages for breach of the obligation or an account for profits. The employer can also (and generally will) seek an interim injunction to prevent the employee from competing until the matter is resolved by the courts, provided that the employer can show that an interim injunction would be appropriate. However, if the court is satisfied that the restriction is prima-facie enforceable, this is unlikely to be a major issue. The employer may also have claims against the new employer. Given the usual length of restrictive covenants and the time it takes for a matter to be heard in full by the courts, if the employer is successful in getting an interim injunction, the parties usually settle.

Jonathan Hallows is a lawyer with Finers Stephens Innocent LLP, a London-based firm that has a well-established specialist employment law department and is a member of Meritas, a nonprofit global alliance of independent, full-service business law firms located in more than 60 countries. The Meritas European Employment Group (www.meritas.org) has employment experts in 27 European countries, and Meritas as a whole has more than 350 employment lawyers worldwide.



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