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Restrictive covenants in employment contracts

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

Two recent High Court decisions underline the importance for businesses of reviewing the restrictive covenants in an employee’s contract when they are promoted and making sure the employee signs and returns the new contract.

In the first case, the employee’s original employment contract (entered into in 2000) contained a one month notice period and a 12 month non-compete clause. In 2005 the employee was promoted and his notice period was increased to three months. He was sent a letter confirming the changes and signed an endorsement in the following terms:

“I agree to the variation of my terms with [the company], which are stated in this letter and I acknowledge and agree that all the other terms and conditions outlined in my original documentation remain unchanged.”

In April 2012 the employee gave notice of his resignation, indicating that he would be joining a company that competed in broadly the same market as his employer. His employer wrote to him confirming that they would regard him as being in repudiatory breach of his employment contract if he went to work for the competitor. The company sought an injunction, seeking to enforce the non-compete clause and the employee counterclaimed for wrongful dismissal. The court refused to grant the injunction and allowed the counterclaim, deciding that a 12 month non-compete clause could not be justified in the case of an employee with the status and responsibilities that the employee had at the time it was entered into in 2000.

The decision reaffirms the principle that the reasonableness of a restrictive covenant must be judged at the time it was entered into, not at the time when the employer sought to enforce it. A subsequent change of circumstances, such as a promotion, could not turn an invalid covenant into a valid one. When varying an employee’s contract, particularly if the employee is being promoted, businesses should review any restrictive covenants and decide whether they need to be entered into afresh. Where the original covenant was unenforceable, it will not be possible to make it enforceable simply by asking the employee to acknowledge that “previous terms remain unchanged”. Businesses should instead get the employee to agree to the new contract, or the restrictive covenant in particular, afresh.

In the second case, an employee was given a new contract containing restrictive covenants after he was promoted. However, he did not sign and return the contract, simply filing it away in his desk drawer. When he resigned with the intention of joining a competitor, his employer sought to rely on the restrictive covenants in the unsigned contract. The court held that the employee was bound by the terms of the new contract, including the restrictive covenants, but only because he had applied for private health benefits which he was only entitled to under the new contract. Although the employer won in this case, it highlights the importance of making sure employees sign and return new contracts issued on promotion as if the employee had not applied for the private health benefits, he would not have been deemed to have accepted the new contract and his employer would have had no protection.

Our checklist explains what restrictive covenants are, when they are likely to be enforceable and how they can be used in employment contracts to protect businesses’ interests.

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