Employment Update RestCov 0108

16 January 2008

Three year ‘golden handcuffs’ restriction upheld; an employee may claim constructive dismissal where the employer makes ‘poisonous’ remarks about him

In RDF Media Group v Clements the High Court recently had to consider the case of a 3-year non-competition covenant. There were none of the usual arguments as to its validity because the covenant was not contained in the employee’s service agreement.

The employee was one of three shareholders who owned and ran a company which they sold to RDF. On completion of the sale he entered into a service contract to work for RDF terminable on six months notice. However, he also entered into a separate agreement under the terms of which, in exchange for almost £2 million in cash and shares, he agreed not to carry on or be engaged in any competing business for three years starting on the completion date.

The agreement provided that the 3-year restricted period could be reduced to two years if he ceased to be an employee of RDF other than as a result of voluntary unilateral resignation or a ‘permitted’ summary dismissal.

Sixteen months into the restricted period he did resign, intending to work for a competitor, and having apparently forgotten the three-year restriction and mistakenly thinking that his departure could only be delayed if he was required to work out his six-month notice period. RDF found out that he had in fact, three days after publicly committing himself to remain with RDF, had talks with the competitor during which he not only discussed terms on which he might work for them but also about which of his current RDF projects he would try to bring with him. He was put on garden leave and was serving out his 6-month notice period when RDF spoke to the press in fairly uncomplimentary terms about his behaviour. He argued that this entitled him to claim constructive dismissal and walk free of the 3-year restriction. He refused to accept any more remuneration and RDF then summarily dismissed him. The High Court was asked to decide two questions:

  1. whether, on the terms of the agreement, it was the two- or three-year restriction that applied; and

  2. whether the employer’s media briefing against the employee amounted to a breach of the implied obligation of trust and confidence, entitling him to claim unfair dismissal.

On the first point, the Court decided that what had started as a resignation case had become a summary dismissal. On the wording of the agreement, unless that summary dismissal were ‘permitted’, the shorter restricted period would apply.

The Court then considered whether the employer’s implied obligation of trust and confidence had been broken by the remarks it had made to the media about the employee, particularly as he had been working out his notice period and was on garden leave at the time.

The Court decided that the employer had overstepped the line in its media briefing against the employee. However, it also decided that, by that time, the relationship between employer and employee had already been destroyed by breaches of obligation by the employee in attempting to take his employer’s business elsewhere. It followed that there was no constructive dismissal, only a justified summary dismissal and so the three-year restriction on competition could be upheld.

Points to note:

  • The Courts are far more likely to uphold non-compete covenants in a business sale agreement rather than an employee’s service agreement. In such circumstances the individual is involved as the owner of a business in commercial negotiations over the value of that business and is not merely an individual wanting a job and thus under economic pressure to agree terms. Also the usual tests of whether the employer has a genuine business interest to protect and whether the covenant is reasonable in extent and duration are considered differently. It is important to get the correct suite of documents in place when purchasing a business where securing the continued employment of highly skilled key employees will be critical to the success of the business.

  • In such a situation, where it makes a significant commercial difference whether the departing employee is resigning or has been dismissed, employers should appreciate that a case which starts, as RDF did, with a notice of resignation, may turn into a summary dismissal or a constructive dismissal depending on the parties’ behaviour during the notice period.

  • It is worth noting that the Court confirmed that RDF continued to owe the implied duty of trust and confidence to the employee even though he was working out his notice and was on garden leave. Although these facts were relevant, the Court ultimately found that this did not entitle the employer to subject the employee to campaign of vilification in the press.

  • The Court in RDF considered in some detail the circumstances in which derogatory remarks made by an employer about an employee might constitute a breach of the implied duty of trust and confidence entitling the employee to resign and claim constructive dismissal. It decided that the following communications could not be included: internal emails between directors (these could be described as ‘the company thinking aloud to itself’); and communications between the company’s executive officers and between the company and its brokers. There could also be no breach of the employment terms unless the communication was made in the context of the employment relationship.

  • Having accepted that it might be a breach of the employer’s implied obligation of trust and confidence for it to make derogatory remarks about an employee to third parties. The Court in RDF then went further and said that (unlike in a defamation claim) it was not a complete defence for the employer to say that what it said was true. The judge said: ‘There may be things which are true about each one of us which would hurt us greatly if the information were published in the media’. If the employer’s conduct in publishing the information without reasonable and proper cause, caused damage to the employment relationship of the necessary degree, the employee would be entitled to resign and claim constructive dismissal. It was only the pre-existing breach of duty by the employee (while still employed and under non-competition restrictions, negotiating with a competitor with a view to working for them and taking existing projects with him) that saved RDF from being guilty of breach when it made a serious attack on his character in the press.

Employment Group