Careful Consideration

The use of restrictive covenants has grown significantly in recent years as our economy and job market improves, encouraging new business start-ups and heightened competition.  The onus of proper use of restrictive covenants has tended to fall towards the employer, but employees must also be sure to act within the restrictions in their contract, otherwise they could face legal action such as an injunction or a claim for damages.  Howard Robson, Employment Partner, here reviews a case which shows a rare instance where an employee was able to move to a competing company, despite a restrictive covenant existing in his contract, and also gives employees some useful advice on working within their employment contract.

Mr Sendall was employed at Re-Use Collections Limited (Re-use) from 1980, and when the business left family ownership in 2000 he remained as an employee and a director of the business.  Mr Sendall had no written contract other than a written statement of particulars up until October 2012 when Re-use provided him with a draft written contract of employment, which included a variety of post-termination restrictions.  Mr Sendall signed the contract on 22 February 2013, but went on to give his three months’ notice on 27 March that year.

After he handed in his notice, Re-use discovered that Mr Sendall was leaving to be involved with and work for a competing business owned and operated by his children (May Glass Recycling Limited).  Re-use therefore sought to enforce a number of restrictions, including a six month non-solicitation and non-dealing clause and a 12 month non-competition clause.

The case went to tribunal as there was disagreement over whether the restrictions were enforceable.  This came into question as the restrictive covenants were added during Mr Sendall’s employment with Re-use, and so the company had to prove that consideration had been given.  They argued it had been as the restrictions had been implemented as part of a new contract and benefits package.  The tribunal however found that the benefits described in the employment contract were already in place prior to the signing of said contract.  Mr Sendall did have a pay rise in January 2013 but this was not reliant on, or in anticipation of the contract including the restrictions being signed.

The tribunal also disagreed with Re-use’s argument that Mr Sendall’s continued employment constituted consideration.  Mr Sendall had been with Re-use for a considerable amount of time, and the fact that he stayed in employment did not constitute acceptance of the new contractual restrictions.  If Re-use had made it conditional that his future employment depended on him signing the new contract containing the restrictions, then this would have changed the argument.

“While it seems Mr Sendall came out triumphant, this case does also carry a warning to employees looking to ignore their restrictive covenants,” explains Howard.  “Even though Re-use were found to not have given consideration meaning the restrictions weren’t enforceable, the tribunal did find that Mr Sendall had breached his duty of fidelity by setting up and work for a competing company.  The fact that he was so intimately involved and didn’t disclose his future plans showed a lack of credibility and intent to conceal damaging documentation.  Re-use was therefore awarded damages of £51,822.20.

“Restrictive covenants are becoming more popular not just due to our current economic recovery, but also as a result of the growing use of social media and the varied routes of creating business relationships,” continues Howard.  “Post termination restrictions are now being used to stop a former employee poaching clients from a previous company and there are many discussions occurring currently around who owns Linkedin contacts for example.  For now, it’s important that employees know what to look out for if they are asked to sign a contract which includes restrictive covenants.”

Before signing such a contract, employees must ensure they understand the scope of the restrictions.  “Elements to consider here include social media use and contacts, or the period of time before working for a competitor or setting up your own business following resignation,” explains Howard.  “If your existing employer asks you to sign a new contract which now features restrictive covenants, as in the case of Mr Sendall, you need to make sure that the consideration given is worthwhile you signing the new contract.”

Howard concludes, “There are many things employees need to consider when it comes to restrictive covenants, and we would always advise that if you are in any doubt or you feel uncomfortable about what your employer is asking you to sign, to seek legal advice.  A professional will be able to review the contract, explain to you exactly what it means you are and are not allowed to do following resignation, and will discuss with you any negotiations you need to make.”

If your employer has asked you to sign a new contract with restrictive covenants included, or you’re entering into new employment with restrictive covenants in the contract, you can contact Howard or the Employment team on 02380 717717 or email employment@warnergoodman.co.uk.  Alternatively, visit their section of the website here.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.