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A recent High Court decision1 emphasises the
importance of ensuring employers regularly review restrictive
covenants contained in employment contracts so that they are kept
up-to-date with any changed circumstances. When an employer is
promoted or job duties change, HR are advised to build in an
automatic review of restrictive covenants and, if necessary seek an
employee's fresh agreement to the existing restrictive
covenant or seek their agreement to new covenants based on their
new duties and responsibilities.
High Court decision
Mr Neilly was initially employed by PAT Systems in 2000 as an
accounts manager on £35,000. His contract contained a 12
month non-compete clause and was terminable on one month's
notice. In 2005 he was promoted to Director of Global Accounts on a
salary of £80,000 with a three month notice period. At the
time, he signed a short endorsement agreeing to the variation in
terms which provided "all other terms and conditions outlined
in my original documentation remain unchanged".
In 2012, Mr Neilly gave three months' notice stating his
intention to work for a competitor. PAT Systems considered this a
breach of his non-compete covenant, summarily dismissed him and
sought an injunction to prevent him from working for his new
employer.
The High Court decided not to grant the injunction because it
considered the restrictive covenants unenforceable. The Court
confirmed that the time of ascertaining the reasonableness of a
restrictive covenant is the time the contract is entered into. A 12
month covenant of this nature was unreasonable for an employee with
the status and responsibilities of Mr Neilly at the time he signed
up for them in 2000. The fact that he acknowledged in 2005 that all
terms and conditions of employment remained unchanged was not
enough to revive an unenforceable covenant, nor could the covenant
be saved merely because his subsequent promotion may have made it
reasonable now.
Key points arising out of this case
The reasonableness of a covenant will be judged at the time it
was entered into. However, note that when exercising discretion to
grant an injunction, the Court will also assess its reasonableness
at the time of the trial.
When an employee's circumstances change (such as a
promotion or a change in duties) employers should assess the
suitability of the covenant and ask the employee either to enter
into a fresh revised covenant or, if you do not wish to draw
attention to the covenant but are satisfied with its terms, to sign
a new contract containing the existing covenant.
Consider very carefully the duration of any non-compete
covenants: their reasonableness will depend on the market in which
the employer operates, the duties of the employee concerned and the
trade connections and confidential information the employer is
trying to protect, but it is common for Courts to find a 12 month
non-compete covenant unreasonably long. In this case, the Court
said that a 6 month covenant would have sufficed, making the 12
month covenant unenforceable in any event.
Ensure there is a unified approach. For example, employees who
pose similar risks because their access to confidential information
and customer connections is similar, should be bound by covenants
of similar lengths. In this case the Court noted that other
employees were bound by 6 month non-compete covenants, which added
weight to the argument that 12 months was excessive.
Footnotes
1 PAT Systems v Neilly [2012] EWHC 2609 (QB)
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