A recent case has provided a timely reminder to employers of the importance of providing adequate consideration when looking to vary or introduce new restrictive covenants during the course of employment.
In Re-Use Collections Limited v Keith Sendall & Ors, there were a number of issues considered by the High Court; one of which was whether Mr Sendall was bound by the restrictive covenants in his contract of employment. Mr Sendall had been a long-standing employee of Re-Use Collections Limited (Re-Use). He did not have a written contract of employment until February 2013, when he signed a contract which contained restrictive covenants. Mr Sendall resigned in March 2013 and the case concerned whether he had been involved in setting up an active competitor to Re-Use.
The High Court held that Mr Sendall was not bound by the restrictive covenants in his contract of employment on the basis that he not received any consideration for agreeing to enter into the contract. The High Court emphasised that, when an employer seeks to impose substantial new obligations on an existing employee"the consideration must comprise some real monetary or other benefit (promotion for example) conferred on the employee for the purpose of causing the employee to agree the restrictive covenant and that it must be substantial and not nominal”.
The High Court rejected the following arguments advanced by Re-Use that the restrictive covenants were supported by consideration:
- A salary increase received by Mr Sendall wasn’t specific to him nor had it been made clear that the increase was conditional on him signing the new contract of employment.
- There was no evidence that a new bonus scheme (for signing up suppliers on long-term contracts) would only be payable on Mr Sendall signing the new contract of employment.
- That contractual benefits conferred upon Mr Sendall under the new contract of employment were already enjoyed by him.
- The continued employment of Mr Sendall did not amount to consideration. Re-Use did not put forward the contract of employment on the basis that a refusal to sign would, or might, lead to dismissal or a lesser sanction. There was no link between Re-Use’s continued willingness to employ Mr Sendall with his willingness to sign the contract.
The High Court separately held that Mr Sendall had been in breach of his duties of fidelity and good faith to Re-Use and awarded damages.
There are a couple of take-away messages from this case for employers who are looking to vary existing restrictive covenants or introduce new ones:
- A salary increase can constitute sufficient consideration, provided that it is specific to the employee and represents a real benefit to them. However, the importance of stating the obvious shouldn’t be underestimated. It should be made clear to the employee that the consideration is identified to the employee, that it is linked to the new contract of employment and that the increase is conditional on the contract being accepted.
- An employer should consult with the employee, to ensure that they fully understand the changes being made to their contract of employment and to obtain their consent.
- If an employer is minded to dismiss an employee who doesn’t accept the change to their contract of employment, a note of caution. The reason for the change should be identified, a deadline for the employee to accept should be set, the employee should be made clearly aware of the consequences that might flow from non-acceptance and a fair and reasonable process should be followed. An employer should also be mindful of potential employment claims that may permeate if an employer proceeds with the dismissal.