The recent High Court decision in PAT Systems v Neilly has confirmed that an unenforceable restrictive covenant will not be rendered enforceable solely by an employee’s promotion to a more senior position.
In this case, the company sought an injunction against Mr Neilly to enforce a non-compete clause in his contract. Mr Neilly had commenced employment with the company in 2000 as an accounts manager on a salary of £35,000 per annum. His contract of employment contained a 12 month non-compete clause. In 2005 Mr Neilly was promoted to a senior position within the company and the company confirmed a salary increase to £80,000 a year, together with an increased notice period. Mr Neilly signed a letter acknowledging the variations and noting that all other terms and conditions outlined in his original contract remained unchanged.
Mr Neilly resigned, indicating that he had accepted an offer of employment with a competitor. The company took this as a repudiatory breach of contract and dismissed him.
It was accepted by PAT Systems that the covenant was excessive for someone of Mr Neilly’s seniority at the time he joined the company in 2000. However, the company argued that Mr Neilly had subsequently been promoted and the covenant should, therefore, be judged with reference to his position in 2005, when he signed the letter re-affirming the general provisions of his contract.
The court disagreed and found in favour of the employee, determining that the reasonableness of a restrictive covenant must be assessed at the date of agreement between the parties. In this case, the relevant date was 2000, when Mr Neilly had commenced employment with the company, at which time the High Court found that the restriction was not reasonable in the context of Mr Neilly’s status and responsibilities. The restrictive covenant was therefore invalid. Mr Neilly’s promotion in 2005 could not convert this unenforceable covenant into an enforceable one without a fresh acknowledgement from the employee in 2005 of the existence of that restriction. To this end, it was insufficient that Mr Neilly had provided a general confirmation of his original terms and conditions – specific acknowledgement of the restriction was required to render the clause enforceable.
Patsystems Holdings Ltd provides a practical reminder to employers to make sure that restrictive covenants are up-to-date. In essence, the High Court has confirmed that a restrictive covenant cannot be rendered reasonable by a change of circumstances at the time the clause falls to be enforced, even in the face of a general acknowledgement from a promoted employee that their terms and conditions remain unchanged.
When promoting, employers must therefore consider whether any restrictive covenants should be renewed. If renewal is required, an employer has two options:
- seek acceptance of any new terms and conditions (by way of a new signed contract of employment) without having to draw particular attention to any restrictive covenant; or
- require the promoted individual to specifically provide fresh acceptance of any restrictive covenants in their existing contracts (regardless of whether those covenants would have been valid prior to any promotion).
Without expressly renewing restrictive covenants when promoting employees, businesses risk losing any potential protection afforded by post-termination restrictions. Although today there are many unforeseeable risks to business success, making sure contracts of employment remain up-to-date falls firmly within the control of the business.