Every employee is obliged by law not to compete with his employer or to act in ways that would harm his employer’s business. But what is the situation after the contract has ended? In short, all bets are off. An employee can compete, solicit, poach and entice away at her heart’s delight in an effort to take away the business, customers or staff from her ex-boss. That’s part and parcel of our capitalist, competitive society.

In an effort to protect themselves, employers insert what are known as restrictive covenants (“non-compete” clauses) in the contract of employment. These clauses are becoming increasingly common in the Bermuda marketplace, particularly in the insurance sector where competition is fierce.

The trick with non-compete clauses is making them reasonable; if unreasonable they will be struck down by a Court as having no effect. Courts start from the premise that these clauses are unreasonable for being in restraint of trade and thus are unenforceable unless proven to be reasonable. Why? Because public policy dictates that a person should not be prevented from earning his living and that Bermuda should not be deprived of the services of a useful, working member of society.

If the clause is unreasonable, the employer cannot get “off the hook” by saying that the employee signed the contract. Signing an unlawful contract does not make it lawful in the same way that a prostitute cannot sue for payment; although the contract was made, the Court will refuse to enforce it on public-policy grounds.

So when will such clauses be enforceable? First, the employer must have a “legitimate business interest” that merits protecting. Examples include “trade secrets,” customer connections and the retention of key employees in a highly competitive business. If the employer cannot show that such a legitimate business interest exists, then any non-compete clause will be worthless.

Second, the clause must be reasonable with respect to 1) the nature of activities being restricted; 2) time and 3) geographical scope. Thus a non-compete that prohibits me from working for any law firm in any capacity for three years anywhere in Bermuda is less likely to be enforced than a non-compete that seeks to stop me from practising as a litigator for one year in the City of Hamilton.

In 1997 the Bermuda Supreme Court struck down non-compete clauses in the case of two hairdressers, given that enforcing the clauses would have deprived the ladies of earning their livings by the use of their skills in their chosen profession. The Court of Appeal agreed with the decision and the hairdressers were therefore free to move on and set up a competing salon.

Employers can also prevent poaching of their key employees with properly worded “non-solicitation” or “non-dealing” clauses. Poaching is quietly prevalent in the Bermuda insurance industry, particularly with new waves of set-ups that have urgent need for highly qualified underwriters. The easiest place for new employers to find staff is in already-established rival companies that stand to lose a great investment in their professional employees. The Courts have become alive to this during the past decade, accepting that an employer has a legitimate interest in retaining key employees.

Another common restrictive covenant is the “non-solicitation of client” clause. This prevents the ex-employee from enticing away former clients to go with the new business. Solicitation is a subtle and difficult phenomenon to monitor, but it’s real—just go to Port o’ Call on Friday at lunchtime and watch the brokers schmoozing away former clients! Employers should note that non-solicitation does not prevent a client from leaving the former employer of his own accord and moving with the departing employee. This can possibly be prevented by a “non-dealing” clause that stops the ex-employee from dealing with a former client, even if the ex-employee was not solicited.

Employers can protect their business in all of the above ways but, in doing so, should not rely on boilerplate precedents. The clause needs to be tailored to their particular business interests and clearly worded so as to protect only what is absolutely necessary. Otherwise, the Courts will strike down the clause and leave the employer with no protection at all.