Post-termination Restrictions Agreed During Employment Unenforceable
Employers need to provide specific and valuable consideration in return for an employee agreeing to enter into post-termination restrictions during employment.
In Re-Use Collections Ltd v Sendall, S worked for a family business until it was sold in the 1990s. He had no written employment contract. In October 2012 he was given a draft employment contract which contained post-termination restrictions, including a non-compete provision. After taking legal advice he eventually signed it in February 2013. In March 2013 he resigned to work for a competing business run by his sons. The company sought an injunction to enforce the post-termination restrictions.
The High Court held that as the restrictions had been introduced during employment, actual consideration had to be given by the company in return for the employee agreeing to them. Otherwise the restrictions would not be enforceable. The consideration must comprise some real monetary or other benefit (for example promotion) conferred on the employee which causes him to agree the covenants and it must be substantial and not nominal.
The company argued that it had provided consideration:
- as the covenants were introduced as part of a package, which conferred benefits, including a pay rise; or
- through S’s continued employment in the months after the contract was produced.
The High Court disagreed, finding that the company had not provided any consideration for the covenants. The new contract predominantly confirmed S’s existing entitlements. Although he was given a pay rise, there was insufficient evidence that:
- it was specific to him;
- that it was conditional upon him signing the contract. In fact it was not referred to in the contract (which still referred to the old salary) and it took effect in January 2013 even though he had not signed the contract at that point; or
- in some more general sense, it was linked to the introduction of the new employment contract.
In addition, continued employment was not sufficient in this case as there was no evidence to suggest that had S declined to sign up to the restrictions, his employment would have been terminated.
This case is an important one for employers. Employers might be forgiven for thinking that once an employment contract has been signed, post-termination restrictions will be binding, subject to the usual hurdles of identifying a legitimate business interest which they protect and ensuring they go no further than is necessary to protect that business interest. However, all contracts need consideration if they are to be binding.
Where employment contracts contain post-termination restrictions on joining, the employer provides consideration by agreeing to employ the employee and paying his salary and benefits. However, if new restrictions are introduced during employment, continued employment will not be sufficient unless there is also an indication that refusal to sign will result in dismissal. This will also be the case if amended restrictions are agreed during employment.
Employers will need to provide a clear benefit such as a pay rise, bonus or promotion and make receipt of that benefit conditional upon the employee signing up to the new restrictions. The same applies to new confidentiality obligations introduced during employment and to post–termination restrictions agreed as part of a settlement agreement on termination of employment.
Normally signing a document as a deed removes the need for consideration. However, that will not be sufficient where it contains post-termination restrictions or confidentiality obligations as this case makes it clear that consideration must be substantial and not nominal.
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