There have been a number of key decisions made over the last few months which emphasise the care employers need to take when promoting employees and how this promotion is documented. Specifically, employers need to ensure that contracts are updated to reflect the new role and appropriate duties generally, but particular care should be taken in relation to restrictive covenants, as shown in the recent cases of Patsystems Holding Limited v Neilly and Safetynet Security Limited v Coppage.
Mr Neilly started working for Patsystems in 2000 in a relatively junior role. His salary was £35,000 and he was on one month’s notice. Critically, he had a 12 month non-compete restrictive covenant in his contract, which stopped him from competing with the Company in relation to business he had been actively involved with during the 12 months prior to the termination of his employment. Mr Neilly was promoted to Director of Global Accounts in 2005 and as a result his salary more than doubled and his notice period increased to three months. Patsystems sent Mr Neilly a letter which recorded this variation to his contract and specified that all other terms and conditions would remain unchanged. Mr Neilly counter-signed this letter. In 2012, Mr Neilly gave three months’ notice that he was going to leave Patsystems and told them that he was going to work for a company Patsystems considered to be a competitor, in breach of his non-compete covenant.
Patsystems applied to enforce the covenant against Mr Neilly, and the High Court rejected their application. The court said that the covenant was not valid at the time it was entered into in 2000, because a 12 month non-compete covenant for a junior employee was not enforceable. The key point that the court made was that restrictive covenants have to be evaluated at the point at which they were entered into. If the covenant was invalid when it was entered into, it was not made valid by the fact that when the employer sought to enforce it, the employee was holding a more senior position. This case emphasises the need for employers to undertake regular reviews of their employees’ covenants, in order to avoid having to defend the enforceability of a covenant in relation to a previous more junior role, when the individual is now in a more senior position.
The important point to note from this decision is that the court rejected the employer’s assertion that the letter which had been counter-signed by Mr Neilly meant that the covenants should be looked at with reference to the new role. The court said that the document only recorded that the other terms and conditions remained “unchanged”, which was not enough to amount to the introduction of a new covenant. As a result of this, employers should make sure that when an employee is promoted, their covenants are clearly restated. It will not be sufficient to simply say that all other terms and conditions (including the covenants) remain unchanged. It was not clear from the Patsystems case whether employers should enter into a brand new contract of employment with a promoted employee or whether a well worded re-confirmation letter will be sufficient. Our view is that at the very least, employees should receive a letter which re-states and expressly renews their covenants with effect from the promotion. If the employee in question is being promoted to perform a key role, where the covenants are of particular importance, we would suggest issuing a brand new contract, to avoid any suggestion that the covenants are judged against the old role.
The case of Safetynet Security Limited v Coppage highlights that it is very important to make sure that covenants are tailored appropriately to the role in question and the context of the covenant. In the Patsystems case, the failing was having a covenant that was inappropriate for the level of employee as it could only really be justified for a more senior employee. In Safetynet, the High Court enforced a very wide six month non-solicitation of customers and clients covenant. The covenant applied to anyone who was a customer or client during the individual’s employment. The court said that this covenant was reasonable, given the very high level of seniority of the individual and his integral role within the organisation (customers saw him as the “face” of Safetynet) and the small size of the organisation’s client base. If Safetynet had not had such a small client base or Mr Coppage had not been so senior, it is likely that this covenant would not be enforceable. The key point to take from this decision is that employers should not adopt a one-size-fits-all approach and should look at and tailor the covenant in the context of both the specific individual and the organisation itself. This will be important when an individual is promoted, particularly if their role is changing significantly.
When promoting an employee, it is important not to forget to update their employment contract to reflect their increased seniority. This was highlighted in the case of Ranson v Customer Systems plc, a case in which a senior employee’s short and very basic contract had not been updated since his early days with the Company. Mr Ranson wanted to leave and go into competition and had two meetings with business contacts before he left. The main part of the employer’s claim was whether Mr Ranson was in breach of any fiduciary duties due to his senior position. The Court of Appeal held that for a non-director, fiduciary duties only exist if they are expressly set out in the contract of employment or are generally consistent with the contract’s other terms. In the Ranson case, the contract did not contain any express terms or terms generally consistent with fiduciary duties, and therefore the employer could not rely on a breach of fiduciary duties by Mr Ranson. It is therefore imperative that when promoting an employee to a senior position, employers make sure that they are put onto a contract which contains express reporting obligations on employees to report all matters of concern to the employer and impose any other necessary contractual obligations equivalent to fiduciary duties.
Taking these recent decisions together, we would advise that when employees are promoted, (particularly if they are being promoted to a senior position), their contract is carefully checked to make sure that it contains the relevant obligations for their level. We strongly advise that employers check the employee’s covenants to ensure that they are suitable for their role and that their covenants are, at the very least, expressly renewed in the promotion letter. If a critical employee is being promoted and post-termination restrictions are crucial, employers should consider entering into a new contract with the employee. Although often employers will want to avoid re-issuing contracts or issuing brand new ones, the combined effects of these three cases, and particularly Ranson and Patsystems, is to increase the number of occasions when this will be necessary.