Career Advice Legal Case studies for employers

Neglecting to update restrictive covenants could cost businesses in the long run

Published on Saturday, 25 Feb 2017

The Background

For many HR professionals, January and February can be the busiest time of the year. It’s no surprise then that certain housekeeping matters may be put to one side or overlooked.

One example of this is the reviewing and updating of employment contracts following a promotion or newly introduced incentive payment. These in particular include updating any restrictive covenants – those important contractual terms that restrict competitive activities post-termination of employment. It’s important that employers do not put such updates off as there may be serious consequences.

Generally speaking, restrictive covenants are not enforceable unless the employer can show they are necessary to protect the legitimate business interests of the employer and that they are reasonable in all circumstances to protect such interests.  Unfortunately, there is no universal definition of what is considered reasonable – this will very much depend on the circumstances. To maximise the chances that they can be enforced, however, restrictive covenants should always be tailored to individual employees with regard to factors such as their role, scope of responsibilities, access to confidential information and client connections, among other factors.

It is therefore important that restrictive covenants are reviewed periodically, and particularly after a promotion to ensure that they remain appropriate both in terms of the scope of the restrictions and the level of protection provided by the restrictions, having regard to the new role of the employee. If new or additional restrictive covenants are introduced, it is important that they are agreed as part of the promotion. Not only are employees likely to be more amenable to agree to new or additional restrictions when offered a promotion, but the pay rise and/or other incentives will also provide clear consideration for the new or additional restrictions.

If there are no restrictive covenants in the contract, then an employer should consider whether this is the right time to put them in place in view of the employee’s increased seniority.

Even where no updates need to be made to the restrictive covenants, it is often beneficial to get the employee’s fresh agreement to the existing provisions. Often employers will simply issue a letter to the employee confirming the promotion and salary increment and the letter will include a provision which says all other terms and conditions in the employment contract remain “unchanged”. However this approach can give rise to problems in the future.

The Case

In a case in the UK several years ago, an employee joined a company in a junior role and was eventually promoted to a senior position. At the time of joining the company he signed up to restrictive covenants which included a 12-month non-compete provision. When he resigned, the company tried to enforce the restrictions against him.

The court held that the enforceability of the restrictions had to be evaluated at the time they were entered into. On that basis they were unenforceable because they were onerous and excessive for a junior employee. The fact that he was in a senior position at the time of his resignation did not matter, as the restrictive covenants had to be evaluated at the time they were entered into.

A critical point in that case was that the company had asked the employee to sign a letter after his promotion acknowledging that, apart from the extra benefits and the salary increment, the terms and conditions in his employment contract would remain “unchanged”. The company tried to argue that this meant the employee had “re-agreed” to the covenants when he was promoted and therefore they should be evaluated with reference to his new role. The court disagreed and said that this alone was not enough to amount to the fresh agreement of the covenants.

The Conclusion

There are a few lessons we can learn from this. First, restrictive covenants should always be tailored to the employee with regard to factors like their role, scope of responsibilities and level of seniority. Even though there is no guarantee that restrictive covenants will be enforceable given that it will depend on the circumstances of each case, the more carefully they are drafted, the more likely they will be upheld.

Second, restrictive covenants should always be reviewed and updated as necessary following a promotion or where an employee’s role has changed. The covenants should not only be updated to reflect the employee’s new seniority; thought should also be given to whether the scope of the restrictions needs changing in light of the employee’s new duties.

Third, even if the restrictive covenants don’t need to be updated following a promotion, it is a matter of good practice to, at the very least, restate them in the promotion letter and to have the employee sign the letter. If the restrictive covenants are especially important in relation to a particular employee, then it may be best to enter into a fresh employment contract.

A timely review of the contract terms, and in particular ensuring that any restrictive covenants are up-to-date and appropriate following a promotion, will potentially save employers from headache further down the road.

 


This article appeared in the Classified Post print edition as Don't be remiss with restrictive covenants.