Many employers find that they have employees on old contracts of employment with unenforceable, inappropriate or even no restrictive covenants. Can an employer simply get an employee to sign a new contract with fresh restrictive covenants and expect them to be enforceable? This was the question raised in the High Court in the recent case of Re-Use Collections Limited v Sendall.
In this case, the High Court considered whether Mr Sendall, who was a senior employee with many years’ service, was bound by restrictive covenants in a new contract he signed just over a year prior to his resignation. The Court held that he was not bound by the restrictive covenants in the contract of employment which he had signed, because he had not been given any ‘consideration’ for those covenants. Consideration is one of the essential requirements of a legally binding contract – it must be something of value passing from one party to the other.
As there had been no consideration given to Mr Sendall, the result was that he had no post-termination restrictive covenants at all. The Court emphasised that, when an employer seeks to impose substantial new obligations on an existing employee “the consideration must compromise some real monetary or other benefit (promotion for example) conferred on the employee for the purpose of causing the employee to agree the restrictive covenant and that it must be substantial and not nominal”.
In this case, Re-Use Collections Limited argued that the covenants contained in the signed contract of employment were supported by consideration, because they were introduced as part of a package under which benefits were conferred upon Mr Sendall, including a pay rise, or alternatively that Mr Sendall continuing in employment after he had signed the contract, and that amounted to good consideration. Those arguments failed for the following reasons:
Whilst Mr Sendall received a pay rise around the time that he signed the contract, there was no evidence that acceptance of that pay rise was expressly or impliedly made conditional on signing the new contract;
1. Whilst Mr Sendall was told about a new (enhanced) bonus structure during a meeting when he was asked if he was going to sign the new contract he had been sent, there was no evidence that Mr Sendall had been told that the bonus would be payable only if he signed the new contract. In the circumstances, the Court held that there was no link between the new bonus and the contract of employment.
2. Many of the other alleged new benefits relied upon by Re-Use Collections Limited were already enjoyed by Mr Sendall prior to him signing the new contract.
3. The argument that consideration was found in Mr Sendall’s continuing employment after the contract was signed failed because the contract was not put forward on the basis that a refusal to sign it would, or might, lead to dismissal, or any other lesser sanction. Things might have been different if Re-Use Collections Limited had given Mr Sendall a deadline, after which specified consequences might flow.
So what are the lessons for employers? Employers must not assume that simply issuing a new contract, even if it is signed by the employee, will mean that the employee is bound by its restrictive covenants. The best approach is to expressly tie acceptance of the new contract of employment containing enforceable covenants to a new benefit for the employee. Promotions offer a good opportunity to get new contracts signed up. Where an employer wishes to introduce new post-termination restrictions more widely, pay rises can also be a good opportunity provided that the pay rise is expressly stated to be conditional upon acceptance of the new contract.
This case acts as a cautionary reminder to employers that simply issuing new contracts to employees may not be the complete answer to ensuring that they have the protection they need from the potential actions of former employees. If you are looking to introduce new contracts, and particularly if you are seeking to introduce new restrictive covenants, it is sensible to take specialist legal advice.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected]).