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Why update Restrictive Covenants?

A recent High Court decision has given employers cause to review their restrictive covenants in all employment contracts.

The decision

The High Court in CEF Holdings Ltd and another v Mundey and others [2012] EWHC 1524 (QB) considered an employer’s application for an injunction to prevent some of its former employees setting up a rival company.

The employer (“CEF”) was an international company employing around 3000 people.  19 employees in the UK left to join a business set up to compete with CEF.  Of the 19 employees, 17 had restrictive covenants in their employment contracts.  These covenants aimed to:

a)   prevent these employees from recruiting other CEF employees (“the employee recruitment restriction”); and

b)   prevent these employees from competing with CEF for a period of 6 months (“the non-compete clause”).

The High Court held that neither of these clauses were enforceable on the basis they were both an unreasonable restraint going further than was reasonable to protect CEF’s legitimate business interests.

a).     The employee recruitment restriction.  This clause referred to “any employee of the Company”.  In a company with 3,000 employees, this restriction was therefore too wide to be reasonable; there would be many employees unknown to the CEF employees who were bound by this restriction so they would be aware of the identity of those who they could not solicit.  The High Court additionally commented on the “surprisingly short period of notice” (of only one week) of the 17 employees and doubted CEF’s argument that they would be difficult to replace, given it had agreed to such a short notice period.

b).     The non-compete clause.   Amongst other things, this clause prevented employees from having any interest in a competitor (including owning just one share in a publicly-quoted company). It was also not clear what activities would amount to competing with CEF.  The clause was therefore too wide and also vague.

The High Court when making its decision also took into account that the two senior employees despite their superior positions when compared to the other 17 employees did not have any comparable restrictions.  The High Court considered this undermined CEF’s argument that it considered it had a “legitimate interest” to protect.

What does this mean for employers?

Whilst the legal principles considered in this case are nothing new, the decision does serve as warning to employers to:

For more information please contact a member of the Floyd Graham & Co team on 01604 871143 or fgmedia@floydgraham.co.uk.

This update is for general guidance only and does not constitute definitive advice.

Updated: by FG Solicitors
Call us on:  0808 172 93 22

WHY UPDATE RESTRICTIVE COVENANTS?

A recent High Court decision has given employers cause to review their restrictive covenants in all employment contracts.

The decision

The High Court in CEF Holdings Ltd and another v Mundey and others [2012] EWHC 1524 (QB) considered an employer’s application for an injunction to prevent some of its former employees setting up a rival company.

The employer (“CEF”) was an international company employing around 3000 people.  19 employees in the UK left to join a business set up to compete with CEF.  Of the 19 employees, 17 had restrictive covenants in their employment contracts.  These covenants aimed to:

a)   prevent these employees from recruiting other CEF employees (“the employee recruitment restriction”); and

b)   prevent these employees from competing with CEF for a period of 6 months (“the non-compete clause”).

The High Court held that neither of these clauses were enforceable on the basis they were both an unreasonable restraint going further than was reasonable to protect CEF’s legitimate business interests.

a).     The employee recruitment restriction.  This clause referred to “any employee of the Company”.  In a company with 3,000 employees, this restriction was therefore too wide to be reasonable; there would be many employees unknown to the CEF employees who were bound by this restriction so they would be aware of the identity of those who they could not solicit.  The High Court additionally commented on the “surprisingly short period of notice” (of only one week) of the 17 employees and doubted CEF’s argument that they would be difficult to replace, given it had agreed to such a short notice period.

b).     The non-compete clause.   Amongst other things, this clause prevented employees from having any interest in a competitor (including owning just one share in a publicly-quoted company). It was also not clear what activities would amount to competing with CEF.  The clause was therefore too wide and also vague.

The High Court when making its decision also took into account that the two senior employees despite their superior positions when compared to the other 17 employees did not have any comparable restrictions.  The High Court considered this undermined CEF’s argument that it considered it had a “legitimate interest” to protect.

What does this mean for employers?

Whilst the legal principles considered in this case are nothing new, the decision does serve as warning to employers to:

  • Ensure restrictive covenants are tailored to the specific circumstances of their business structure and the business interests they want to protect (i.e. confidential information, or customer/trade connections) and take into account the nature of the employee’s role who is to be bound by the covenant.
  • Ensure the restrictive covenants are no more restrictive than is reasonable.  Employers should seek legal advice to assist in determining what is reasonable. This may include consideration of the length of notice periods as well as the scope and duration of the restriction.
  • Review and update restrictive covenants when acquiring new employees or when existing employees are promoted.  If the restrictive covenants (or lack of them) in senior employees’ contracts can be taken into account when deciding whether more junior employees’ restrictive covenants are enforceable, it would be prudent to review and update the restrictive covenants of the entire workforce when significant changes are made.  It is always important where employees are promoted to renew any restrictions or to introduce them (where there are none).

For more information please contact a member of the Floyd Graham & Co team on 01604 871143 or fgmedia@floydgraham.co.uk.

This update is for general guidance only and does not constitute definitive advice.