When an employer introduces restrictive covenants during an employee’s employment, the employee must receive “consideration” for these to be enforceable.
It has been unclear if the consideration has to be a cash and/or a non-financial benefit or whether stating the employee’s employment will not continue if they fail to sign up to the covenants constitutes consideration.
In Re-Use Collections v Sendall & Ors, the employer introduced restrictive covenants when revising its standard contract and implementing a salary review. The employer argued that the consideration was either the pay rise, some new benefits offered under the revised contract or the employee’s continued employment.
The High Court dismissed each of the employer’s arguments. It found that the employee was actually already entitled to the majority of the new benefits set out in the revised contract. The employer had also failed to make clear that either the pay rise or the employee’s continued employment was conditional upon his acceptance of the new restrictive covenants. Despite signing the revised contract, the High Court held the employee was not bound by the restrictive covenants it contained.
In deciding the outcome, the Judge did not rule out the possibility that an employee’s continued employment could, in some circumstances, constitute consideration. In an interesting comment in non-binding Obiter, the Judge indicated that the adequacy of the consideration was relevant to the reasonableness of the covenant. It suggests that if you offer a token benefit in return for an existing employee accepting wide ranging and prohibitive restrictive covenants, a court will take this into account in assessing the overall reasonableness (and thus enforceability) of the covenants.
The lessons you can draw from this case are not new but always worth revisiting:
- It is easier to introduce restrictive covenants at the start of employment than during it.
- When introducing covenants, you should offer some consideration and make employees aware that the consideration is offered in return for their acceptance of the restrictive covenants.
- Relying on continued employment as consideration is riskier than offering a cash or non-cash benefit. Since a court would scrutinise the “consideration” more closely in such circumstances, it is important to make clear that the employee’s employment could be at risk if they do not sign up to the new terms. Likewise, you may have more serious questions asked about the overall reasonableness of the covenants.