Payments for new restrictive covenants

28 January 2015

A company could not enforce restrictive covenants against a former employee where there had been inadequate consideration given for their introduction.

In Re-use Collections Limited v Sendall & May Glass Recycling Ltd, Re-use sought to enforce restrictive covenants in the High Court against a former employee who left to join a competing business shortly after signing a new contract of employment. Prior to signing the contract and for the duration of his employment to that point, Mr Sendall did not have a written contract nor any post-termination restrictions. He had received a pay rise which was not referred to in the contract.

The Court found that Re-use did not provide adequate consideration to Mr Sendall for the purpose of binding him to the restrictive covenants. As Re-use was seeking to impose substantial new obligations on Mr Sendall, the consideration would have needed to comprise some real monetary or other benefit (such as a promotion) to cause him to agree to the restrictive covenants, which needed to be "substantial and not nominal". Mr Sendall already enjoyed the benefits that were referenced in the new contract prior to its drafting. Also, a pay rise that Mr Sendall received was not reflected in the new contract, which erroneously referenced his salary at that time. It was also not made clear that the salary increase was linked in any way to entering into the new contract.

The Court found that Mr Sendall's continued employment did not amount to consideration for the change.   Had his future employment been made conditional upon signing the new contract containing the restrictions the Court commented that it may have been different.  Re-use was simply asking a long-serving employee to accept new, substantial, contractual restrictions and, as such, Re-use did not seek to link its continued willingness to employee Mr Sendall with his willingness to sign the contract.

The Court did find that Mr Sendall had breached his duty of fidelity by being directly and intimately involved in setting up the competing business that he left to join and was very critical of Mr Sendall's credibility, stating that he showed a positive intention to conceal damaging documentation. The Court awarded Re-use damages of £51,822.20.

Points to note –

Many employers have employees that either do not have post-termination restrictions in their contracts, or have restrictions that are inappropriate for their role. In order to validly incorporate new post-termination restrictions, consideration must pass between the parties. This means that tying it in with a promotion or pay-rise represents an ideal opportunity, where it is advisable to expressly link that benefit to the signing of the new contract or restrictions. As continued employment alone was not sufficient to vary the contract here, the case indicates a relatively high threshold to validly incorporate new post-termination restrictions, requiring something substantial, rather than nominal, where potentially onerous restrictions are to be introduced.

If an employer does not intend to offer any new benefit to an employee, consideration should be given to making future employment expressly conditional upon signing the restrictions, or even terminating the previous contract and offering a new one, although in practice neither of these options are likely to be attractive to employers who are seeking to retain valued employees.