Employment Update: Spotlight on restrictive covenants and TUPE

17 December 2007


In the case of a TUPE transfer, careful consideration must be given to any restrictive covenants contained in the employment contracts of transferring employees.

  • In an ordinary case, where the employee transfers automatically under TUPE to the transferee, the benefit of the restrictive covenant will pass automatically to the transferee along with the rest of the employee’s contract. However, questions will remain as to the enforceability of the covenant by the transferee. Any restrictions will still be interpreted by reference to the transferor’s customers, staff or contacts with whom the employee had had previous dealings. But is it still reasonable in extent and duration now that the employee is working for the transferee not the transferor? Transferor and transferee should consider whether there should be an express assignment of the benefit of any relevant employee restrictive covenants included in the terms of the business transfer document which might make them more easily enforceable by the transferee.

  • Any post-transfer variation of the restrictive covenant to make it more relevant to the transferee’s business, and thus more likely to be enforced by the Courts, must be approached carefully and on specialist advice, bearing in mind that such a variation will be ‘TUPE-related’ and therefore potentially unenforceable (see Power v Regent Security). It is best to consider these issues early on in the sale process so as to avoid these problems, especially in businesses that rely on the abilities of the staff and their relations with customers.

  • In the New ISG case the Court considered that, because the employees had objected to the transfer after the transfer had occured, their employment contracts – and the benefit of the restrictive covenants – did not pass automatically to the transferee. This is a relatively unique and unusual situation.

  • However, in different circumstances, where the employee is entitled to exercise his right to resign under TUPE Reg. 4(9) (where the transfer would involve a ‘substantial change in working conditions’ to his ‘material detriment’) and claim constructive dismissal, the restrictive covenants will become immediately unenforceable because he has resigned in response to a repudiatory breach of contract which entitled him to walk free of any remaining contractual obligations – including post-termination restrictive covenants.

All these are legal issues on which advice should be obtained early on in negotiations for the sale or transfer of any business where the continuing presence of key employees may seriously affect the goodwill and thus the value of the business.

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