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Employment Law - Restrictive covenants: well if you don't like it you can... ?

This article, written for HR professionals, considers the issues facing employers seeking to impose changes in the terms of employment by introducing restrictive covenants.

 

Without these changes the business will…


Assuming that the employer got round to providing written contracts of employment in the first place it’s not unusual to find that after a period of time there has been some real or perceived change in the competition that (according to the employer) demands important changes to the contract of employment. Employees are viewed as desirable recruits for competitors who will exploit the knowledge and contacts that the new employee acquired in his previous job.

HR managers faced with the demands that the employees’ contracts be unilaterally varied quite properly recoil in horror at the prospect. A contract involves a bargain between two parties where each signifies their acceptance to the agreed terms. In what circumstances will an employer be able to impose such terms without being faced with immediate claims for unfair constructive dismissal?

Unreasonable restraint of trade?


As a matter of public policy covenants in employment contracts which seek to impose restrictions on an employee after the termination of the employment will only be enforceable if they are no more than reasonably necessary to protect the legitimate business interests of the employer. Typical restrictive covenants seek to prevent competition, soliciting of clients, poaching of business and employees or protect confidential information. The challenge to such covenants is often made when the ex-employer seeks an injunction against the ex-employee restraining them from working for the competitor or working in a particular geographical area or disclosing confidential information. An unreasonable covenant will be unenforceable and of no use to the employer.

Lump it or leave


In the recent decision in Willow Oak Developments Ltd v Silverwood the Employment Appeal Tribunal was faced with an employer who had sought to impose restrictive covenants on its employees to protect it from what had already been a number of successful attempts by its competitors to poach its employees and business. When some of those employees had refused to sign the new contracts the employer had dismissed them. There had been no prior consultation about the changes. The operations director’s approach was variously found to be abrupt, rude, aggressive, unreasonable and intimidating – not ideal characteristics for the task! As if that was not bad enough the employment tribunal had found that the covenant sought to be imposed was itself an unreasonable restraint of trade. So far as the employment tribunal was concerned if the covenant was unreasonable there could not be available to the employer the “some other substantial reason” defence to the claims for unfair dismissal and fairness did not need to be considered. The employer had failed to get past first base.

The EAT disagreed. It is not the role of the employment tribunal to determine whether the restrictive covenant is unreasonable or not. The starting point was whether the reason for which the dismissal took place could amount to some other substantial reason. The refusal on the part of an employee to agree to a revised contract could amount to some other substantial reason for the dismissal.

The tribunal has to decide whether the dismissal is fair or not having regard to all the circumstances as required by section 98(4) Employment Rights Act 1996. The reasonableness of the covenant therefore falls to be considered at the stage of fairness not at the prior stage of determining whether the employer has shown a possibly valid reason for the dismissal. If it turns out that the covenant is considered to be too wide that will not mean that the dismissal was necessarily unfair - the employer may have acted perfectly reasonably in seeking to protect its business and have acted on legal advice with proper consultation. The proper test when considering the fairness of the dismissal was “whether the employer had a genuine belief that the dismissal for that reason was justified.”

Plainly unreasonable, arguably unenforceable and plainly reasonable


The EAT did give some guidance when considering the reasonableness of the covenant:-

  • If the covenant is plainly unreasonable then the tribunal is likely to conclude that there was unfairness.
  • If the covenant is arguably unenforceable then the approach of the employer to its introduction will need to be considered in greater detail. How much time were the employees given to consider the terms? Was opportunity given for taking legal advice?
  • If the covenant is plainly reasonable then although the tribunal will have to consider the fairness of the procedure the dismissal is likely to be fair.

Unfortunately lawyers will very often be able to argue about the wording of the clause.

So what do we do?


If the current contracts do not contain restrictive covenants consider whether they are needed for this particular category of employee. Does this employee have access to genuinely confidential information? What customer/client connections does this employee have? What would a competitor seek to exploit if this employee joined them?

What is and what is not a reasonable restraint of trade is a difficult judgment and you will probably be best advised to seek legal advice. Be prepared to keep the covenant to a shorter duration or narrower geographical extent than you might wish. Make sure you consult in a reasonable fashion with the employees affected. Give them the opportunity to take legal advice.

Finally if you have done all that and the employee refuses to sign do you sack the employee? If it was an matter of such importance to impose the covenants in order to protect the employer then the answer should be yes.

This article was first published on the Consult GEE Legal Human Resources website and is reproduced here with permission.