Employment Review: January 2015 – Consideration required for restrictive covenants

The recent High Court case of Re-Use Collections Limited v Sendall & May Glass Recycling Ltd provides a timely reminder of the unpredictability of relying on and enforcing post-termination restrictive covenants.

In this case the employer, Re-Use Collections Limited, attempted to enforce post-termination restrictions against a former employee, Mr Sendall, who had left to join a competing business, May Glass, which was run by his sons.

Mr Sendall was a senior and longstanding employee of Re-Use but had never been given a written contract of employment. In 2013 Re-Use issued Mr Sendall with a written contract of employment which was signed by Mr Sendall and contained a number of post-termination restrictions; these included 6 month non-solicitation and non-dealing clauses, and a 12 month non-competition clause. Mr Sendall had not at this time received any monetary or other consideration for entering into the new contractual terms. He had also initially been reluctant to sign the new employment contract.

Mr Sendall’s departure to join May Glass followed shortly after the implementation of the new contract of employment and restrictive covenants in 2013; Re-Use sought to rely on and enforce the restrictions against Mr Sendall in an attempt to oust him from the competing May Glass business.

The Court accepted that the new contract was a variation of the existing contractual relationship and where the employer was seeking to impose new obligations on an existing employee this needed to be supported by some consideration either monetary or other benefit such as a promotion.

The Court refused to enforce the restrictive covenants against Mr Sendall on the basis that he had not received, “some real monetary or other benefit,” for the variation of contract. Re-Use sought to rely on several benefits some of which Mr Sendall was not even aware (for example, an ‘upgrade’ to a life assurance policy which Mr Sendall already benefitted from) and others which were not relevant or related to the new contractual terms. Notably Mr Sendall’s continued employment was not a benefit capable of amounting to consideration, since there had been no suggestion that he would have been dismissed if he had refused to sign the new terms and conditions. A pay increase given to Mr Sendall around the same time was also not sufficient consideration because there had been no indication that the pay rise was related to the change in contractual terms, or that it was specific to Mr Sendall or conditional upon him agreeing to the new terms and conditions.

Comment

This case serves as an important reminder that meaningful consideration is required to make restrictive covenants enforceable against employees where they are introduced after the employee has started work.

When issuing new contracts, or seeking to enforce new contractual terms, employers should plan to do this at a time when for example there is a bonus or pay rise due which can be provided specifically as consideration for and is conditional on the employee agreeing to the new terms and conditions. It appears from the judgment that there must be a causal link between the provision of a pay increase/bonus and an employee’s agreement to the new contractual terms. Alternatively a specific payment could be made to the employee in return for agreeing the restrictions or any new contract could be executed as a deed.

Likewise, in settlement negotiations when employers are seeking to enforce new post termination restrictions, some monetary or other consideration needs to specifically apportioned and stated to be in consideration for the employee agreeing to enter into the restrictive covenants.

This is only a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist advice should be sought from a member of Freeths Employment Team in relation to any queries.

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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.