Employment Update: Restrictive covenants



An employee may find it hard to argue that he has been constructively unfairly dismissed on the basis of his employer’s actions towards him after he has given notice of his intention to resign. Restrictive covenants will be upheld following a resignation but not after a constructive dismissal.

In Extec Screens & Crushers v David Rice, decided by the High Court on 4 May 2007, the employee had handed in his resignation and was working out a 3-month notice period. Initially, his resignation was not accepted by his employer and he was put under pressure to stay. He then agreed to work out his three-month notice period.

As a result, he was taken off key projects and lost the use of his laptop and mobile phone. He was also written to by the employer’s solicitors, asserting their legal position, setting out the covenants in his employment contract at length and requesting formal undertakings from him not to breach them, failing which he was threatened with legal action.

He argued that all these actions were in repudiatory breach of the employer’s implied duty of trust and confidence towards an employee, entitling him to leave immediately and claim constructive dismissal. He did so. His employers claimed that he had not been constructively dismissed but had resigned and the High Court agreed.

Critically, the judge said that any implied term would be overridden by an express clause in his employment contract which stated that, during any notice period, the employer –

‘shall be under no obligation to assign any duties to [the employee] and … may require [the employee] to carry out specific projects provided that this shall not affect his entitlement to receive salary and other contractual benefits’.

The employer’s 8-month non-competition restrictive covenant was also upheld on the basis that the employee had valuable confidential information (he was responsible for sales of machine parts and knew details of customer requirements and supplier arrangements) and was intending to work for a direct competitor.

Points to note:

  • It is important for employers to have key workers on written contracts of employment which have been tailored to their particular circumstances. In the Extec case, it helped the employers that Mr Rice’s contract contained specific clauses dealing with the duties to which he could be assigned while working out his notice and allowing his employer to put him on ‘garden leave’ during that period; giving the employer a discretion to say what type of information it regarded as being company-confidential; and a restriction preventing him from working for a competitor for 8 months which could be brought into play to protect against misuse of the confidential information. Would you like us to review your existing employment contract terms to see whether they could be revised to better protect your business interests?

  • The High Court was happy to allow the restrictive covenant to run from the end of the three month notice period – effectively preventing Mr Rice from competing for a total of 11 months. The Court commented that ‘periods of up to 12 months are commonly upheld by the Courts’. Not all restrictive covenants will be upheld by the Courts. Please ask us for advice on the circumstances in which restrictive covenants will be upheld by the Courts and the wording that should be employed to render them more likely to be enforced.