Employment e-Brief: Restrictive Covenants
Thursday 11th December 2014
An important decision was made in the High Court last week, which has a significant impact on employers looking to issue new contracts to employees which contain new restrictive covenants.
In the case of Re-Use Collections Limited v Sendall & May Glass Recycling Ltd, Mr Sendall was employed by Re-Use, a glass recycling business. Prior to October 2012, Mr Sendall had no contract of employment but he did have a written statement of employment particulars which did not contain any restrictive covenants.
In October 2012, he was asked to sign a new contract which included 6 month non-solicitation and non-dealing clauses and a 12 month non-compete clause, which he signed in February 2013.
Shortly after signing the contract, Mr Sendall left to join May Glass, a competing business which was operated by Mr Sendall’s sons (also former employees of Re-Use) and in which Mr Sendall was involved.
As part of the claim against Mr Sendall, Re-Use sought to rely upon the restrictive covenants set out in the new contract that he had signed.
The High Court refused to enforce the restrictive covenants as Mr Sendall had not received “some real monetary or other benefit” for the variation of contract.
Re-Use argued that the covenants contained in the contract of employment were supported by consideration, because they were introduced as part of a package under which benefits were conferred upon Mr Sendall. However, the Court found that the majority of those benefits were already enjoyed by Mr Sendall prior to him signing the contract and also found that Mr Sendall was unaware of the one additional benefit (an enhanced life assurance policy) that he was given under the new contract.
Perhaps more importantly, the High Court were not willing to accept that Mr Sendall’s continued employment was a benefit, as there had been no suggestion that he would have been dismissed if he had refused to sign the new contract.
What does this mean for employers?
Businesses faced with amending contracts of employment to increase post-termination restraints will need to ensure that they can show that the employee receives a benefit in return for entering into the new restrictive covenants. Benefits could include a pay rise or increased employee benefits, such as health insurance. If they do not do this, they run the risk of being in a position where the restrictive covenants are unenforceable.