UK: Are Your Employees’ Restrictive Covenants Up-To-Date?

Last Updated: 10 October 2012
Article by Nick Dent and Ruth Bonino

A recent High Court decision1 emphasises the importance of ensuring employers regularly review restrictive covenants contained in employment contracts so that they are kept up-to-date with any changed circumstances. When an employer is promoted or job duties change, HR are advised to build in an automatic review of restrictive covenants and, if necessary seek an employee's fresh agreement to the existing restrictive covenant or seek their agreement to new covenants based on their new duties and responsibilities.

High Court decision

Mr Neilly was initially employed by PAT Systems in 2000 as an accounts manager on £35,000. His contract contained a 12 month non-compete clause and was terminable on one month's notice. In 2005 he was promoted to Director of Global Accounts on a salary of £80,000 with a three month notice period. At the time, he signed a short endorsement agreeing to the variation in terms which provided "all other terms and conditions outlined in my original documentation remain unchanged".

In 2012, Mr Neilly gave three months' notice stating his intention to work for a competitor. PAT Systems considered this a breach of his non-compete covenant, summarily dismissed him and sought an injunction to prevent him from working for his new employer.

The High Court decided not to grant the injunction because it considered the restrictive covenants unenforceable. The Court confirmed that the time of ascertaining the reasonableness of a restrictive covenant is the time the contract is entered into. A 12 month covenant of this nature was unreasonable for an employee with the status and responsibilities of Mr Neilly at the time he signed up for them in 2000. The fact that he acknowledged in 2005 that all terms and conditions of employment remained unchanged was not enough to revive an unenforceable covenant, nor could the covenant be saved merely because his subsequent promotion may have made it reasonable now.

Key points arising out of this case

  • The reasonableness of a covenant will be judged at the time it was entered into. However, note that when exercising discretion to grant an injunction, the Court will also assess its reasonableness at the time of the trial.
  • When an employee's circumstances change (such as a promotion or a change in duties) employers should assess the suitability of the covenant and ask the employee either to enter into a fresh revised covenant or, if you do not wish to draw attention to the covenant but are satisfied with its terms, to sign a new contract containing the existing covenant.
  • Consider very carefully the duration of any non-compete covenants: their reasonableness will depend on the market in which the employer operates, the duties of the employee concerned and the trade connections and confidential information the employer is trying to protect, but it is common for Courts to find a 12 month non-compete covenant unreasonably long. In this case, the Court said that a 6 month covenant would have sufficed, making the 12 month covenant unenforceable in any event.
  • Ensure there is a unified approach. For example, employees who pose similar risks because their access to confidential information and customer connections is similar, should be bound by covenants of similar lengths. In this case the Court noted that other employees were bound by 6 month non-compete covenants, which added weight to the argument that 12 months was excessive.

Footnotes

1 PAT Systems v Neilly [2012] EWHC 2609 (QB)

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