Post-Employment Restraints: Are employees still bound after they leave?

Authors: Ann Bugeja & Clyde Bonnici

Abuse of power, or freedom to contract?

During employment, the relationship between the employer and the employee is one of trust, confidence and faith. Due to this acquired trust, confidence and faith, employment contracts in Malta often include restraints to regulate employee’s activity even after said contracts’ termination, so that such trust, confidence and faith remains unbetrayed. These clauses are commonly referred to as post-employment restraints.

These clauses have been the subject of continued debate in Malta, especially with respect to whether such clauses are enforceable or not. There are various aspects at play, amongst which a delicate balance must be struck. Some aspects listed hereunder:

• The employee’s right to earn his living, and knowledge and skills obtained in his former employment will undoubtedly enable him to continue to do so. While the employer is entitled to limited protection against an employee who may well be seeking to compete.

• The contractual terms reflecting the will of the parties at the moment of signing of the contract, and they must therefore be respected. While, despite being freely agreed upon by the parties, post-employment restraints can be considered as being in restraint of trade, and thus may be considered by law to be contrary to public policy and therefore unenforceable.

Therefore, Maltese Courts have held that such clauses are not prohibited in the Maltese legal system, as long as certain rules established by case law are followed. Courts have held that these clauses and their enforceability must be considered on a case-by-case basis.

Types of post-employment restraints in Malta

Maltese Courts have identified four legitimate interests in respect of which the employer is entitled to limited protection, namely:

1. Trade secrets and confidential information;
2. Existing customers and connections;
3. Working for direct competitors/ customers;
4. Enticing existing employees.

It is the protection of these interests which is the intention behind post-employment restraints in Malta.

Recent court judgements on post-employment restrains in Malta

In Alliance Yachting Company Limited, a judgement decided on the 14th of October 2021, proceedings were brought against the employee for allegedly breaching a clause in his contract restricting him from:

1. For two years after his termination, soliciting entities who at any time during a period of two years preceding his termination, were customers of the employer;
2. For one year after termination, be involved or employed with a company competing with any business of the employer;

With respect to the first clause, the Court held this to be unreasonably onerous: by covering clients of the company going back two years before termination, it not only restricted solicitation of current clients, but also clients that had not dealt with the company for up to two years. Moreover, the clause applied not just to regular clients of the company, but to any client, including those that were only one-time clients.

With respect to the second clause, the Court also held this to be unreasonable. The non-compete had no geographical limitation to Malta, and it restricted the employee from being employed with a company who is a competitor not just of the primary business of the company, but with respect to ‘any business of the Company’, even if it is a secondary one. The Court considered this to be too wide and unreasonable. Moreover, the clause did not compensate the employee for the time for which his capacity to work is to be restrained, and this also fell foul of the requirements for such clause to be valid.

The topic of post-employment restraints arose once more in the more recent judgement in the names of Delvetro Limited vs Kishore Kumar Neduru, decided on the 26th of September 2024. In that case the contract of employment of the employee, a former accounts officer of the plaintiff company, included a clause prohibiting him, for 2 years following termination, from being employed or offering services to the clients of his former employer, with whom he had direct contact. A breach of this condition envisaged a penalty of €30,000 as pre-liquidated damages. The former employer sued for this amount, alleging that within the 2 years, defendant had become employed with a client.

The Court in this case considered the following to be reasonable:

• The duration of two years;
• The restriction on the employee not to be employed with a client with whom he had direct contact.

However, the Court considered the following factors to be unreasonable:

• The employee being prohibited from providing any service to the client of his former employer (and therefore even services that have nothing to do with his role as an account officer);
• The lack of a definition of having ‘direct contact’ with the clients of his former employer;
• The excessive amount of pre-liquidated damages, which amounted to over 4 times the employee’s annual salary.

For these reasons, the Court held the clause to be unenforceable.

Key takeaway: Drafting valid post-employment restraints in Malta

Despite there being no codified Maltese law on post-employment restraints, the Courts have not held back in pronouncing themselves emphatically on the enforceability of these clauses. The Courts have ventured into uncharted legal territory, creating their own legal principles, which they mend and apply according to the facts of the particular case before them. For the drafters of employment contracts, one thing is for certain: post-employment contract must be very carefully drafted. Otherwise, should these clauses fall foul of the principles of fairness established by the Maltese Courts, employers may try and enforce such clauses, only for them to be struck down.

For an overview of employment law in Malta, see our dedicated practice area page.