When dealing with cases involving the enforcement of a restrictive covenant in an employment contract, the courts have to strike a balance between the need to protect the legitimate business interests of an employer and the right of a former employee to ply his trade. In many of these cases the decision is dependent upon the specific facts of the case. Occasionally, however, some general principles emerge. In the case of Pat Systems – v -Graeme Neilly [2012] EWHC 2609(QB) the court decided that when assessing the reasonableness of a restrictive covenant, it needed to do so at the time that restrictive covenant was entered into and not at the time of the allegedly offending conduct.
Background
In that case the covenant in question was a non-compete covenant for twelve months covering a restricted area which included the United Kingdom, Continental Europe and USA.
The defendant had commenced employment with the claimant in June 2000 as an Account Manager on a salary of £35,000 per annum with a notice period of one month each way. By the time of his departure, he was a member of the claimant’s Executive Committee and had direct client responsibility for a small number of customers designated as “global”. His base salary was £115,000 together with a commission and pension package.
The court decided that the reasonableness of the restrictive covenant should be assessed at the date it was agreed. The company conceded that the imposition of a twelve month non-compete clause could not be justified in the case of an employee with the status and responsibilities enjoyed by the employee when he was first engaged in 2000. However, the company argued that the employee’s contract had been varied in July 2005 when he was given
- a new job title reflecting enhanced responsibilities;
- a substantial increase in remuneration (salary and pension); and
- a longer notice period.
It was argued that the employee should be treated as having, at that point, entered into the restrictive covenant afresh. The court decided that if that had been done explicitly then it would have regarded the covenant as having been entered into at that date as a fresh covenant and the issue of its reasonableness could have been judged as at that date. However, the way that the contract had been varied did not entitle the company to make an implication that the restrictive covenant should be deemed to have been accepted afresh by the employee as at that date.
Summary
This case will encourage employers to be more careful about using a standard form of restrictive covenant for all employees at whatever level within the organisation. In order that they have the best chance of being regarded as reasonable, but, at the same time giving maximum protection to the business, , restrictive covenants should be designed with specific reference to the employee’s changing status.
Given that most employees will be promoted whilst they are working for their employer, the nature of the restrictive covenant that he should be asked to sign may need to get stronger so as to reflect the increased responsibilities and influence of any new position. The employer will need to be able to prove that the change was explicitly accepted. Good practice requires that at the same time as the employee is being invited to accept an increase in salary and other benefits, he should be invited to confirm that he accepts any new restrictive covenants which the company might wish to impose.