It is common practice nowadays to include restrictive covenants within employment contracts, particularly for senior employees but the importance of getting them right has been reinforced by the decision in the recent case of Patsystems Holdings Ltd v Neilly.
Mr Neilly began his employment with Patsystems Holdings, as an Account Manager, in 2000. At the start of his career, he was earning £35,000 and his contract contained a one month notice period and a 12 month post-termination, non-compete covenant.
In 2005, Mr Neilly was promoted to the position of Director of Global Accounts, his salary was increased to £80,000 per annum and his contractual notice period was extended to 3 months. Patsystems wrote to Mr Neilly to record these changes to his contract and stated that all of his other terms and conditions would remain unchanged.
In April 2012, Mr Neilly gave notice to Patsystems that he wished to leave and work for a company that Patsystems considered to be a competitor. Patsystems, unsurprisingly, sought an injunction to enforce the non-compete clause in Mr Neilly's contract.
Mr Neilly argued that the non-compete clause was not reasonable when he joined the company in 2000 and was, therefore, unenforceable. Patsystems response was that Mr Neilly had confirmed his agreement to the covenant again in 2005 when he had accepted the other changes to his terms and conditions following his promotion.
The High Court refused to grant the injunction. It stated that the test was whether the non-compete clause in Mr Neilly's contract was reasonable at the time it was originally entered into (in 2000). The junior nature of Mr Neilly's role when his employment began did not justify a 12 month non-compete clause, a fact acknowledged by Patsystems. In the Court's opinion, the subsequent variation to Mr Neilly's contract in 2005, with a general acknowledgement that all other terms and conditions remained unchanged, did not serve to make the non-compete clause valid at that point.
The High Court went on to say that the employee's explicit acceptance of the post-termination restrictions or, possibly, the signing of a fresh agreement, without specifically drawing the employee's attention to the non-complete clause, would have been sufficient to ensure the clause was enforceable.
The lesson to learn from Patsystems' misfortune is that restrictive covenants need to be reasonable at the time they are entered into. Employers should carry out regular reviews of their employees' contract terms and ensure that restrictive covenants are appropriate and necessary. If an employee's role changes within the business (i.e. following a promotion) and this necessitates a consequent change in the employee's contractual terms and conditions, it is advisable to ask the employee to sign a new contract which incorporates the new terms or to explicitly accept and agree to be bound by the existing terms, including any restrictive covenants.