In a time of economic uncertainty, the need for effective restrictions preventing former employees from competing, poaching customers and taking staff is particularly strong, especially for employees at a more senior level. When you are dealing
with post-termination of employment restrictions, there are a number of issues concerning enforceability that you need to consider carefully and two recent case law decisions have highlighted some of these.
In Patsystems Holdings Ltd v Neilly, the High Court stated that a restrictive covenant which was unenforceable at the time the employment contract containing the covenant was entered into was not subsequently made enforceable by an employee’s
subsequent promotion to a more senior role. In this case, the employee’s contract included a number of restrictions, including a 12 month non-compete covenant, and this contract was entered into in 2000 when the employee was first employed as a junior account
manager. Five years later the employee was made Director of Global Accounts on a salary of £80,000 and at that time he signed a letter agreeing that the terms and conditions in his original contract remained unchanged. A further seven years later, when the
employment came to an end and the employer tried to enforce the covenants, the employee was being paid over £190,000, but was still employed under his original employment contract.
The High Court, in deciding whether to enforce the post-employment restrictions had to consider whether they were reasonable, as covenants will only be enforced if the Court feels that they are a reasonable restriction on the employee in
question. The High Court confirmed that reasonableness (and therefore enforceability) must be judged as at the date the covenant was entered into. In this case, the covenant was not reasonable for an employee with the status and responsibilities which the
employee had in 2000 when he entered into the employment contract containing the covenant and consequently the covenant was unenforceable. It remained unenforceable despite the fact that the employee had subsequently been promoted and despite the fact that
the covenant would have been reasonable for an employee working at that level he eventually reached. The reasonableness test had to be applied based on the facts as at the time the covenant was entered into, which in this case was the year 2000.
In the second case, FW Farnsworth Ltd and another v Lacy and others, the High Court decided that an employee was bound by the terms of a new contract of employment provided to him after he was promoted, but which he had not signed and returned
to his employer. The new contract contained post-termination restrictions which the employer wanted to enforce when the employment later came to an end.
The Court stated that the employee’s acceptance of the new contract could be implied by the fact that he had applied for private medical insurance cover that was only available to him under the new contract. The employee was therefore bound
by the terms of the new contract from the date he applied for the private medical insurance.
Alison Loveday of Berg comments: "Each of these cases highlight a number of important points:
• Employers should ensure that post-termination restrictions are re-considered as promotions occur. Any promotions should, as a matter of course, prompt a review of the relevant employee’s contract and, if necessary, a new contract should
be entered into containing restrictions which are appropriate for the employee’s new position. A letter simply stating that the terms of the previous contract will continue to apply will not necessarily be enough.
• Employers should ensure that existing employees actually sign and return new contractual terms issued following a change in role or a promotion. In the Farnsworth case mentioned above, if the employee had not applied for the private medical
insurance, it seems that the Court would not have found that he was bound by the new contract and therefore bound by the post-employment restrictions contained in it.
• For employees, the Farnsworth case highlights the fact that if an employee does not wish to accept a change to their contractual terms imposed by their employer but continues to work for that employer, then the employee should make it very
clear that they are working under protest and that they do not accept the new terms."
To discuss how we can provide further advice in connection with these issues, please contact Alison Loveday, Managing Partner and Head of Employment, by email to firstname.lastname@example.org or alternatively you can call Alison on 0161 833 9211.
The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice. No responsibility for this article’s accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal
advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.