Restrictive Covenants

The Problem

Whilst making sure your personnel files are up to date you discover that an employee, who has been working with you for ‘donkey’s years’, does not have a written contract of employment.

Not only that, he has risen up to a senior management post.  You therefore get the employee to sign a new contract.  Within the contract there are some new restrictive covenants.

The employee then leaves your employment, shortly after signing the contract, to work for a competitor.  The new employment is apparently in breach of the covenants he has just signed up to.  The departing employee, however, challenges the enforceability of those covenants.

The Principle

This is similar to the scenario reported in the case of Re-use Collections Limited v Sendall and May Glass Recycling Limited.

The basic legal principle is that for a contractual term to be binding there must be ‘consideration’.  In this case the High Court refused to enforce the restrictive covenants as Mr Sendall (the departing employee) had not received “some real monetary or other benefit” for signing the new contract.  Indeed, it was said that Mr Sendall was unaware of one of the benefits which Re-use sought to rely upon and most of the benefits were unrelated to the proposed new terms.  His continued employment was also not a benefit since there had been no suggestion he would have been dismissed if he refused to sign up to the new contract.

The Practice

It is common (and indeed good practice) for employers to update employees’ contracts, especially when employees are promoted.  If the result of updating contracts is the introduction of new restrictions then take care with how you introduce them.  You need to make clear what consideration is being given to the employee (e.g. one off payments, pay rise, promotion, enhanced benefits package) and that the consideration relates to signing the new contract (which includes the new restrictions).

For more information, help or advice please contact Tim Davies on 0191 211 7927.