With the movement of recruiters around our sector robust restrictive covenants are essential in protecting your candidate and client base and ultimately the value of your business. In our monthly legal update Flora Mewies of Ward Hadaway runs through the key points for you to be aware of when introducing or updating a restrictive covenant for an existing employee
When someone new joins the business, the offer of employment is usually conditional upon them signing up to a contract of employment which will contain restrictive covenants, but there is no need to assign specific consideration in order to make the restrictions enforceable. In this situation, consideration takes the form of the remuneration paid by you to the employee.
Given the longevity and dynamic nature of the employment relationship, it is often necessary to introduce restrictive covenants for the first time or to amend existing ones which may not be as robust as they now need to be.
The Pickwell Case
The legal position in relation to whether the employer should provide some form of consideration when introducing new or amending restrictive covenants has been uncertain.
However, the recent case of Pickwell v Pro Cam CP Limited considered the enforceability of restrictive covenants and specifically considered whether valuable consideration was given for these after the employees had begun to work for the employer.
The employees began working as trainees and initially signed an offer letter setting out their role, notice period, salary and benefits. There was no reference to restrictive covenants in the offer letter.
After their employment began, they signed formal contracts containing restrictive covenants and received no additional pay or incentive for doing so.
The intention was for the employees to undergo a period of training and ultimately qualify, taking over from long-serving employees who were looking to retire in the coming years. After qualifying, they were given access to a significant part of the company’s customer base.
Several years later, both employees resigned, served their notice and informed the company of their intention to join its main competitor. The argument put forward by the ex-employees was that the restrictive covenants were unenforceable because the employer did not provide consideration when it required the ex-employees to sign up to a contract containing restrictive covenants, as these did not form part of the original offer letter.
The varying forms of consideration
The ex-employees were trainees when they signed up to the restrictive covenants and since then, their access to customers and confidential information had advanced significantly. The ex-employees argued that as they had not received any valuable consideration for entering in to the restrictive covenants, they could not be enforced against them by the company. The restrictions in question were non-solicitation and non-dealing restrictions.
Traditionally, we think of providing consideration when the employee receives a bonus, pay rise or promotion – something tangible they receive in return for agreeing to new or more onerous restrictions. This was not present in this case. The High Court found that this did not matter. It said that even though the contracts containing the restrictive covenants were entered in to after the employees’ employment began, they received consideration in the form of access to commercially valuable work, valuable status and training to enable them to progress in their careers.
A persuasive factor in this decision was evidence that if the employees had not agreed to the contracts and restrictive covenants contained within, they would not have been given the opportunity to take on increased responsibility, access to opportunities and bonuses derived from this.
How does this benefit recruiters?
The recruitment industry like many other professional services businesses is a people business – candidates and clients instruct people that they feel comfortable working with and with whom they have developed relationships with over time.
Robust restrictive covenants are essential in protecting your candidate and client base and ultimately the value of your business.
The Pickwell decision, in certain circumstances, gives you an opportunity to impose new restrictions and update existing restrictions without causing alarm and the additional cost that giving monetary consideration brings.
However, it should not be assumed that consideration will always be found where the employee is being given an opportunity to develop within the role. What was in the parties’ contemplation at the time that the contract was entered in to is crucial.
It will be difficult to rely on the type of argument that was successful in Pickwell retrospectively if at the time, this was not actually a relevant consideration when offering the new terms. It is sensible for the directors of the business to consider what the company will do if the employee refuses to enter in to new or updated restrictive covenants after their employment has begun:
- If they will continue carrying out their role in the normal way, the employee will have a good argument to say that they received no valuable consideration for entering in to the more onerous restrictions. The result is likely to be that the new restrictions are void and unenforceable and the position will revert back to any previous restrictions that were in place or none at all if this is the first time you are introducing restrictions;
- If they will prevent the employee from continuing to access your confidential information, databases and restrict their contact with clients and candidates, this could amount to valid consideration. The employee should be consulted with on this point and be informed that this is the case when the new contract is provided to them and ideally, it should be referenced in writing in the contract or covering letter; and
- If the employee will be dismissed on notice and then offered re-employment on the same terms but with new restrictive covenants, you need to tread carefully to avoid being faced with an unfair dismissal claim. It will be necessary to show a sound business reason for the change and to carry put a fair process leading to dismissal, otherwise the dismissal can be found to be unfair by an Employment Tribunal.
In appropriate circumstances the Pickwell case does provide you with a degree of flexibility and certainty in not paying an employee to enter into new or amended restrictive covenants during the period of employment. Ultimately what is going to be key is the communication process that you go through with the employee, the consequences of not agreeing to the restrictive covenants and the reasonableness of the restrictive covenants themselves.
* Flora Mewies is a Solicitor in the Employment team at law firm Ward Hadaway. For further information on the issues raised in this article, please contact Flora at flora.mewies@wardhadaway.com
