We talk a lot about how HR can protect your business. This is particularly evident in the area of employment contracts. We encourage our clients to ensure that they put appropriate restrictive covenants in their contracts to prevent employees working for competitors, stealing customers and stealing employees after they leave your employment.
There is interesting case law which highlights the need to review the restrictive covenants that your employees sign, particularly when they are promoted.
1. Employee Rise through the Ranks
A key case is Patsystems Holding Ltd v Neilly. In this case, the employer looked to rely on the restrictive covenants they had in their contract which prevented an employee from going to work for the competition.
The employee in question joined in a junior position. They then rose through the ranks and held a director position at the date of termination. With each promotion, the employee was issued with a letter confirming certain variations to his terms and conditions of employment. However, no mention was ever made of the restrictive covenants.
2. Failed to Enforce a Non-Compete Clause
The employee looked to join a competitor after leaving Patsystems, and Patsystems applied to the High Court to enforce a 12-month non-compete clause.
The courts decided that, given that the employee had entered into the agreement when he first joined the company and had not re-affirmed his agreement to the non-compete clause, they needed to look at how reasonable the restriction was when the agreement was first entered into and the employee held a junior position.
They felt that in a junior position it was unreasonable to prevent an employee working for a competitor for a period of 12 months. Therefore, the court concluded that the clause could not be enforced.
They stated that it would be reasonable to prevent a senior employee from working for a competitor for 12 months. Therefore, had he been asked to re-affirm his agreement at a later date, then it is likely that the clause would have been enforceable.
3. Active Management of Contract Restrictions
There are some important lessons for businesses to learn here.
- Firstly, make sure the restrictions you place on employees are reasonable considering the position they hold.
- Secondly, make sure that you confirm in writing any changes to terms and conditions which arise from a promotion. You should explicitly re-state the restrictions to which the employee is agreeing.
- Finally, stay up-to-date. It’s all too easy to put a big tick in a box that an employee has signed their contract when they first joined and that you need never worry about this again. Don’t make this mistake. Regularly review contracts to make sure that they keep pace with changes to legislation and your business.
Need help in review and update of your contract restrictions?