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Restraint of Trade: what is a Departure Lounge clause?

Posted on 12 June 2024

Departure Lounge clauses, also known as "waiting room" clauses, are clauses which limit the number of employees, partners or members of an organisation who can leave within a certain period of time, usually the organisation's financial year or calendar year. Departure Lounge clauses are usually found in partnership agreements, LLP members' agreements and sometimes shareholder agreements.

Departure Lounge clauses are usually included in agreements to try to prevent an entire team from moving from the same organisation at the same time. If a number of partners, exceeding the limit set out in the Departure Lounge clause, want to leave at the same time as those who have already resigned, they will need to wait in the Departure Lounge for a period of time, before they too can leave.  

A classic example would be if a member of an LLP gives notice of retirement with a retirement date falling within a rolling 12-month period within which (say) three other members will also retire. If the clause prohibits more than three people departing in a 12-month rolling notice period, it may render that member’s notice of retirement void and prevent them from validly giving notice until at least one of existing three retiring members has departed.

There are a number of potential variations on this theme, for example:

  1. The clause might specify a fixed 12-month period (such as a calendar year or an accounting year) rather than a rolling 12-month period. This approach runs the risk that several members retire at the very end of the fixed 12-month period and then several more retire at the very start of the following fixed 12-month period, resulting overall in a large number of retirements within a short space of time;
  2. Instead of the clause rendering any further notices of retirement void, the clause might specify that any such notices of retirement are automatically extended by a fixed period of time (so that they are less bunched together); and/or
  3. It might specify that the clause only applies if the threshold number of retirements relate to members who work in the same team or business area (which would prevent large team moves).

What are the benefits of including a Departure Lounge clause?

There can be many potential benefits for organisations including Departure Lounge clauses in agreements. For example:

  1. Retention of capital – if a number of partners leave at once, resulting in an obligation to return their capital, a firm might have to borrow elsewhere (if they are able to do so at all);
  2. Retention of clients – when partners leave, their clients very often follow;
  3. Retention of the best partners – those who tend to be lured away by other firms are often the best at bringing in and retaining clients; and
  4. Maintaining the stability of the workforce – the loss of several members/partners at around the same time may lead to a situation where the business loses the expertise needed to service its clients. This can lead to a ‘domino effect’ in terms of the loss of customers and/or the loss of other staff who wish to follow the departing members/partners.

Are Departure Lounge clauses a restraint of trade?

There has, to date, been a presumption that Departure Lounge clauses can amount to a restraint of trade. If this is correct, then in order to be enforceable the Departure Lounge clause, as drafted, must not go any further than is necessary to protect the organisation's legitimate interests.

There are, however, arguments that Departure Lounge clauses do not amount to a restraint of trade at all. This is on the basis that such clauses are concerned only with the giving of notice. Departure Lounge clauses are not concerned with the duties owed during a period of notice; their effect is to prevent a person from resigning at a time of their choosing on the giving of the requisite contractual notice. Where a Departure Lounge clause uses a rolling 12-month period, it might prevent someone from leaving for a very lengthy and uncertain period of time (because the clause may give rise to overlapping and/or successive 12-month periods when further retirements are embargoed). 

Departure Lounge clauses are still to be tested in the courts and so, at present, there is no binding authority on their enforceability. Accordingly, it is currently very difficult to say with any degree of certainty whether or not Departure Lounge clauses are unenforceable as a matter of law.

Pending clarification of this, and given the benefits mentioned above, we can expect to see continued use of Departure Lounge clauses for the foreseeable future.

If you would like more information on departure lounge clauses, please get in touch with your usual Mishcon de Reya contact or with a member of the  Employment team

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