Friday, 21 Dec 2012

Avoid the Pitfalls of Employment Contracts

Avoid the Pitfalls of Employment Contracts

Avoid the Pitfalls of Employment Contracts

When a promotion takes place, it is very easy for an employer and an employee to simply confirm the new responsibilities, notice period and salary without looking at the other terms such as restrictive covenants that exist between the parties. The recent case of Patsystems Holdings Limited v Neilly has however highlighted the risk of failing to do that. 

Mr Neilly began working at Patsystems in 2000 as a junior account manager – he had a contract of employment which contained a covenant that restricted him from working for a competitor of the company for 12 months after his employment ended; the contract also contained a notice period of one month.

Mr Neilly was promoted in 2005 to a senior sales role – his salary rose by £45,000 and his notice period was increased to three months. Mr Neilly signed a letter agreeing that, apart from the changes to his remuneration, notice period and duties, his other terms and conditions would remain the same as they were in 2000.
In 2012, Mr Neilly resigned from Patsystems giving them three months’ notice. Mr Neilly told Patsystems that he was going to work for a competitor. Patsystems told Mr Neilly that he could not go and work for the competitor because of the 12 month restrictive covenant in his contract and they applied to the Court for an injunction to stop Mr Neilly taking on his new role.

Mr Neilly argued that the 12 month covenant was not enforceable because it was not reasonable at the time that he had signed his contract in 2000. Patsystems argued that Mr Neilly was bound by the covenant because he had accepted it when he had signed the letter in 2005 following his promotion.

The Court found in favour of Mr Neilly – it said that the 12 month covenant was unreasonable for an employee of Mr Neilly’s status in 2000. The Court then went on to say that the covenant had not then become reasonable by virtue of Mr Neilly’s promotion in 2005, even though he had signed a confirmatory letter about his terms and conditions – the Court said that this letter did not bring the covenant to life. What was needed in the circumstances was either a new contract with the 12 month covenant in it or an express acceptance by Mr Neilly of that restriction.

Interestingly, the Court said that even if the Mr Neilly had expressly accepted the covenant in 2005 and/or signed a new contract with that restriction in it, it would still have found the 12 month period was unreasonable bearing in mind the market, the nature of the information that Patsystems were seeking to protect and the connections Mr Neilly had made.

What lessons can be learnt from the Neilly case? It is a reminder that unless a restrictive covenant was (1) reasonable at the time it was entered into and (2) relevant at the time an employee left, it will not be enforceable. It is also a reminder that if an employer wants to rely on a restrictive covenant, they must ensure that it is fair and reasonable at the time, not in the future, balancing the need to protect the business against unfairly preventing an employee from working. Finally, if an employee is promoted, any restrictive covenant should be reviewed at that stage and if necessary, the employee should be asked to expressly accept the restrictive covenant in the original contract or sign a new contract.

 


Alan Davidson
Partner, Employment Law & Litigation

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