For many employers, the ability to enforce restrictive covenants when key employees leave can be of grave concern. Generally, the more senior an employee is, the wider the employer’s restrictions on his post-termination activities can be. However, the reasonableness of a restrictive covenant is judged at the time the covenant was entered into, not at the time the employee leaves. Employers trying to rely on out-of-date covenants may find that they are too wide to be enforceable, despite the employee’s current seniority. In Patsystems Holding Ltd v Neilly, the High Court considered what an employer must do in order for an employee’s covenants to be effectively reaffirmed on promotion and to avoid any skeletons in the closet.
Mr Neilly commenced employment with Patsystems in June 2000 as an account manager on a salary of £35,000. His contract contained a one month notice period and a 12 month non-compete clause.
In 2005 he was promoted to Director of Global Accounts with a salary of £80,000, and signed a letter which agreed to his new package and stated: “I agree that all the other terms and conditions outlined in my original documentation remain unchanged.”
In 2012 Mr Neilly gave his notice and informed Patsystems he intended to work for a rival company. Patsystems sought an injunction to enforce the non-compete clause.
The High Court held that the clause would not have been enforceable in 2000 because it was too harsh a restriction for an employee at Mr Neilly’s level. The key question, therefore, was whether the covenant had been entered into afresh in 2005. The High Court decided that the letter of 2005 did not constitute a fresh acceptance of the covenants. Helpfully, the judgement set out the two ways in which the employer could have engineered a fresh acceptance of the covenants:
• By explicitly asking Mr Neilly to give his fresh acceptance of the covenant previously contained in his contract; or
• By asking Mr Neilly to sign a fresh employment contract, containing the covenant, without specifically drawing his attention to the covenant.
The case highlights two key issues:
1. Always ensure the covenants are tailored to the appropriate job and seniority; and
2. Keep covenants under review. If any employee’s job or seniority changes follow the above steps.
We would be more than happy to assist with your covenants to avoid any future scares!