Covenants Unenforceable as Managers’ Contracts Contained No Restrictions
The High Court has held that a failure to include restrictive covenants in employees’ managers’ contracts put the enforceability of the employees' own covenants at risk.
In CEF Holdings Ltd v Mundey and others, a group of employees left their employer to work for a competitor. The employer sought to enforce post-termination restrictions in the contracts of some of the employees which prevented them soliciting any employee of the company and from working for a competing business.
The High Court held that neither of the restrictions was enforceable. The non-solicitation provision was too wide as it extended to all employees of the company, some 3,000 in number, only a small proportion of whom were known by each employee. The non-compete provision was too wide as it went further than was necessary to protect customer connections. The employees had provisions in their contracts which precluded them soliciting customers and this gave the employer sufficient protection.
The Court went on to say that the absence of any comparable restrictions in the employment contracts of the employees’ managers undermined the employer’s contention that it had a legitimate interest to protect in terms of the stability of its workforce. If the managers could solicit staff unrestricted, then there was no reason why more junior employees should be restricted. There was a much stronger justification for including restrictions in managers’ contracts than in the contracts of their subordinates and the employer had given no reason for failing to impose similar restrictions on the managers.
When finding the non-solicitation clause unenforceable, the court also took into account the fact that the employees were only required to give one month’s notice. It said that if the employees were so important to the employer, they ought to have been subject to substantially longer notice periods.
This case demonstrates the importance for employers of ensuring that restrictive covenants are included in the employment contracts of senior members of staff, otherwise restrictions in the contracts of staff reporting into them may be unenforceable. It also demonstrates that the length of the notice period may affect the enforceability of provisions prohibiting the solicitation of staff – as a short notice period suggests the employer is not concerned about protecting the stability of the workforce and so does not have a legitimate interest to protect.
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