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 Restrictive Covenants – what’s the benefit?Restrictive Covenants – what’s the benefit?

» Posted on: 3 March 2015

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Not long ago, a client asked for advice over whether they could rely on post-termination restrictions that their employee had agreed to following the resignation from their employment, even though the employee had not received any tangible benefit for them in return.

The query was timely as it came shortly after a recent case in the High Court that found a company could not enforce restrictive covenants against a former employee where there had been no specific consideration.

In Re-use Collections Limited v Sendall & May Glass Recycling Ltd, Mr Sendall had worked for Re-use (a glass recycling business) since it was family-run but it had left family control. He had no written contract of employment and no post-termination restrictions. In February 2013, he signed a new contract of employment which included a number of restrictions including six month non-solicitation and non-dealing clauses and a twelve month non-competition clause. Shortly afterwards, he left to join a competing business (May Glass), operated by his sons and in which he was also involved.

The High Court refused to enforce the restrictive covenants as Mr Sendall had not received "some real monetary or other benefit" for the variation of contract. He was unaware of one of the benefits which Re-use sought to rely upon and most were unrelated to the proposed new terms. His continued employment was likewise not a benefit since there had been no suggestion he would have been dismissed if he refused to sign up.

So what does it mean for you? It is important for employers to consider very carefully at the beginning of employment, during employment and then on exit from employment, what legitimate and important business interests you want to protect and which employees, in particular, may cause a risk to your business if they were to leave. It is crucial that any post-termination restrictions are agreed at the same time that the employee is receiving a benefit - i.e. they receive an offer of employment for a salary or are given a pay rise during employment or a payment on termination possibly through a Settlement Agreement. Such a benefit is known as consideration, which must be given in order for you as the employer to rely on the post-termination restrictions. Of course, the restrictions themselves must be reasonable. but if you can’t even get past the first hurdle, what is the point in having them in the first place?!

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