A recent case, Patsystems Holdings Ltd v Neilly, has highlighted some of the important factors courts will use to determine the enforceability of restricted covenants in employment contracts.

Often when employees gain promotion their employment contracts will remain on the original terms, which might be out of date. In this case a junior employee was given inappropriate restrictions in his contract, which could not be enforced after he had been promoted.

The Facts

Mr Neilly originally joined the business in 2000 as a junior salesman where his employment contract included a type of restrictive covenant known as a non-compete clause. This prevented him, after employment, from joining a competitor for 12 months.

In 2005, he was promoted to a senior role for which the covenant was reasonable. However, at no point was the covenant specifically re-agreed, only that all other terms in his original contract remained unchanged.

In 2012, Mr Neilly resigned indicating that he planned to join a company Patsystems (“the employer”) considered a competitor. The employer told Mr Neilly that he could not join the competitor because of the non-competition clause and summarily dismissed him.

The employer applied to the High Court for an injunction to enforce the 12-month non-compete clause.

Decision

The High Court confirmed that the enforceability of a restricted covenant must be judged at the time it was entered into, not at the time when the employer sought to enforce it.

As the covenant was unenforceable at the time it was agreed, given Mr Neilly’s junior status, a subsequent change of circumstances, such as a promotion, will not turn an invalid covenant into a valid one.

The employer failed for three reasons:

  1. A 12 month non-compete clause went further than was necessary to protect the employer’s interests;
  2. The restriction was void from the beginning as it was given to a junior employee; and
  3. The employer dismissed the employee in breach of the contract; therefore it could not rely on it.

Impact on Employers

Employers who wish to enforce restrictive covenants against employees who have been promoted should ensure that those covenants are expressly restated (and amended if necessary) when the senior role begins. This can either be by a fresh agreement to the covenant or by asking the employee to sign a new contract containing the covenant.

It is not enough merely to state that the employee`s terms remained unchanged.

However, as an alternative employers could consider using longer notice periods and garden leave, providing greater certainty and is a potentially cheaper method of protecting your business.