FREE CHAPTER from ‘Restraining Competition by Employees – A Practical Guide to Restrictive Covenants, Injunctions and Other Remedies’ by Peter Linstead

CHAPTER TWO – ISSUES DURING EMPLOYMENT

Disciplinary procedures, garden leave, introducing new restrictive
covenants and settlement agreements

2.1. Discovering preparatory or competitive activity whilst the employee is still employed

2.1.1. Frequently, competitive activity is only discovered after an employee has departed. If, however, the employer is fortunate enough to discover it whilst the employment relationship is ongoing, there are a number of measures which can be taken.

2.1.2. All employees are subject to an implied contractual duty of fidelity. There is a significant volume of case law on the point at which acts by an employee in preparation for competitive activity will breach this duty – certainly not all preparatory acts will do so – and the problem of identifying this point is considered in detail in later chapters. Nevertheless, if it can be established that an employee’s activities breach this implied term, it is likely that the breach is a repudiatory breach of contract and potentially gross misconduct, which can provide a basis to bring disciplinary proceedings.

2.1.3. A decision will need to be taken whether to suspend the employee during any investigation. This may be necessary to allow an investigation to proceed without hindrance. However, suspension also has certain disadvantages, in that it will be very difficult to control and monitor the activities of the employee. Indeed, if they are already secretly contacting the employer’s clients, it may give them a greater opportunity to do so.

2.1.4. During an investigation, one of the obvious places to look for evidence of wrongdoing is the employer’s computer systems and, to the extent it is possible to do so, electronic devices held by the employee. The following considerations are relevant to this search.

  1. It may be necessary at an early stage to appoint an independent IT expert to assist with this process.

  2. It is important to be clear about the extent to which the employer has the right to monitor and search the employee’s work email and instant messaging. Monitoring of employees at work involves the processing of personal data and, as such, is regulated by the GDPR. Consequently, various safeguards are needed such as considering and documenting the legal grounds for processing personal data in the context of monitoring. Consent will not likely be valid in an employment context, but the employer’s legitimate business interests might be relied on instead as a legitimate basis to access the information. Of course, the whole process will be more straightforward if the employer has written monitoring policies in place, for all employees, in advance of these activities being carried out.

  3. Instant messaging and ‘chat room’ histories can be very revealing and are increasingly being used as a source of evidence in proceedings. Whilst disclosure of an employee’s personal chat history could only be obtained via court proceedings, there are often work-based instant messaging platforms, such as Bloomberg and Skype Instant Messenger for Business, which can legitimately be accessed from the employer’s systems.

  4. Customer relationship management systems with contact details may show in their histories when information was accessed by the relevant person and whether it has been downloaded to other computers or storage devices.

  5. Unusual requests for downloads or prints of information such as customer contact information may be revealing.

  6. Social networking sites such as Facebook, LinkedIn and Twitter can provide a surprising amount of information about employees’ activities. Given the ability of employees to upload and remove information quickly, it is prudent to take screenshots of material which is discovered in this way.

2.1.5. If the employer decides to run disciplinary proceedings, it is particularly important to take care that any process is run fairly. A failure to do so might amount to a repudiatory breach of contract by the employer, either of the terms of a contractual procedure or of the implied term of trust and confidence. The employee might then resign and claim constructive dismissal, and in this instance, the employee would allege that any restrictive covenants in the employment contract are not enforceable because of the employer’s breach. Alternatively, if the employer terminates the contract following an inadequate procedure, the employee could still contend that the employer has committed a repudiatory breach and consequently that s/he is not bound by restrictive covenants.

2.1.6. If the employee’s actions suggest that s/he will leave imminently to join a competitor, the employer might wish to invoke garden leave provisions in the contract, under which the employee would be bound by the duty of fidelity throughout the notice period. This avenue could be used whether or not there are also PTRs. The use of garden leave injunctions to force the employee to comply with the contract in these circumstances is considered in detail in chapter 10 below.


2.2. Introducing new restrictive covenants

2.2.1. It is common for employers, during the currency of employment, to seek to get employees to enter into restrictive covenants which were not originally contained in their contracts.

2.2.2. Clearly the first step would be to get the employee to agree to new restrictions. If he or she will not agree and it is an absolute imperative for the business to secure the protection of restrictive covenants, the extreme solution is dismissal, coupled with an offer of immediate re-engagement on the revised terms. This is a risky course which should not be embarked upon without legal advice. Hopefully the employee will agree, making this course unnecessary.

2.2.3. However, in addition to securing agreement, it is well established that an employer who wishes to get an employee to enter into new and/or more onerous restrictions needs to provide the employee with separate valuable consideration. It is not enough for the employee merely to sign the new contract. Where an employer seeks to impose substantial new obligations on an existing employee, the consideration must comprise ‘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 it must be ‘substantial and not nominal’.1

2.2.4. Matters commonly relied upon as consideration in these circumstances are pay rises, promotion, training and continued employment in circumstances where the employer can satisfy the court that had the employee not agreed, the employment would have been terminated.

2.2.5. This principle was applied by the High Court in Re-Use Collections v Sendall [2015] IRLR 226 and it resulted in a senior employee not being bound by restrictive covenants in a new contract which he had signed. The defendant was a senior employee of a glass recycling business. He had formerly owned it as a family business. Shortly before his departure, the claimant had given him a new contract of employment including restrictive covenants, which he signed. Around the time he signed the new contract, he had received an increase in salary. The Judge found there was no consideration for these new covenants. The claimant said that the consideration was (i) his increase in salary; and (ii) his continued employment. The Judge found there was no evidence that either was directly referable to the covenants, as the employer had not made it clear that either was linked to, or conditional upon, the defendant’s entry into the restrictive covenants. There was no evidence that had he not entered the covenants, his employment would have come to an end. In the absence of express restrictive covenants, the employer’s case could only be based on the implied duty of fidelity. This aspect of the case is considered in more detail below.

2.2.6. Two other recent cases have applied the same principle but in each case it was found that separate valid consideration had been provided.

2.2.7. In Pickwell v Pro Cam CP Ltd [2016] EWHC 1304 (QB) the claimants were trainee agronomists, learning to advise farmers on the purchase and use of agricultural chemicals, who had received a written offer of employment and had signed a document accepting that offer. Some weeks later, they signed a contract of employment containing the disputed restrictive covenants. After training with the defendant by shadowing other agronomists and then working independently advising farmers for a short period, they were then offered employment by a different company and brought a claim disputing the validity and enforceability of the covenants. Judge Curran QC found that the relevant legal principles were as follows:

  1. The burden was on the defendant to establish that the claimants were bound by the contracts containing the restrictive covenants.
  2. If express consent to the contracts could not be established, the case would turn on the issue of implied or inferred consent.
  3. To establish such consent it is for the employer to show an “unequivocal act implying acceptance” per Jacobs LJ in Khatri v Cooperatiev Centrale Raiffeisen-Boerenleenbank BA [2010] EWCA Civ 397, [2010] IRLR 715.
  4. In that regard, the EAT decision in Solectron v Roper [2004] IRLR 4 (approved in Khatri) was important, in particular per Elias P at para 30: “is the employee’s conduct, by continuing to work, only referable to his having accepted the new terms imposed by the employer?”
  5. The intention of the parties and the fact of acceptance or otherwise is, in accordance with the ordinary principles of contract, to be objectively ascertained.
  6. Even in the situation of an alteration to the advantage of the employee, the ‘only referable’ test had to be satisfied: Khatri.
  7. Where a person alleges inferred or implied acceptance, he must show that the benefit invoked was only available pursuant to the contract in question, and that the invocation of that contractual right was in unequivocal terms, such as to be referable only to acceptance of that contract: FW Farnsworth v Lacy [2012] EWHC 2830, [2013] IRLR 198.

2.2.8. On the facts, the contract had been determinable on only one week’s notice during the probationary period. The evidence was that their employment would have been terminated if they had refused to sign the amended terms. There was no evidence that they had objected to its terms at the time of signature. The case could be analysed as either the formation of a completely new contract or as a variation of the existing terms of contract concluded by the acceptance of the offer letters. The claimants’ conduct in continuing to work under the contract was only referable to their having accepted the new terms, which included the restrictive covenants. There was, therefore, sufficient consent. The defendant had also conferred benefits upon the acceptance of the formal contracts which amounted to valuable consideration, by providing them with status and training in the field.

2.2.9. In Decorus v Penfold [2016] EWHC 142 (QB), the High Court applied the same principles. The claimant had been subject to a 9-month non-competition clause. In May 2013 he signed a new contract with more extensive PTRs lasting six months. The Court had to decide which applied. Whilst the claimant had received a pay rise, that had happened a few weeks before he signed. The Court accepted the employer’s evidence that had he not signed the new contract, he would have been dismissed. It held that taken together the employee’s appraisal, a pay rise and continued employment were valid consideration in the particular circumstances, because the appraisal and pay rise were part of a three-phase process, in which the signing of the new contract was the final phase.

2.2.10. As can be seen from the cases above, the High Court has made different decisions on facts which appear at first sight to be quite similar. However, the cases are fact sensitive and everything turns on whether the acts relied on to constitute consideration are genuinely referable to the change in contractual terms to the detriment of the employee.


2.3. Tactics when the employee leaves – termination agreements

2.3.1. There might be a need for a settlement agreement, for example, if the parties are in dispute, if there is a redundancy situation or if the departing employee was also a shareholder, such that a share purchase agreement is necessary on departure. Even if the restrictions in the employment contract were adequate, there is obvious value in the employee making a further express commitment to be bound by them and agreeing in writing that they are reasonable. This is given added force by the fact that the employee cannot validly enter into the agreement without the benefit of legal advice. Whilst an agreement that the clauses are reasonable would not prevent the court subsequently assessing their validity under restraint of trade principles, it would nevertheless be of some evidential value.

2.3.2. From the employee’s perspective, a discussion of restrictive covenants at the point of leaving may give them the opportunity to try to agree any variation which will assist them in the next stage of their career. Alternatively, they may try to agree a list of restricted clients, in order to avoid any ambiguity about who might be approached.

2.3.3. Where there are no, or inadequate, restrictions in the contract of employment, an employer might wish to introduce specific time-limited restrictive covenants in a settlement agreement. If new restrictions are being entered into via a settlement agreement, that will be a new contract or a variation of an existing one and it is therefore important that consideration is given. This would need to be specified as separate consideration by, for example, a proportion of any payment made under the agreement being allocated specifically to consideration for the new restrictive covenant.

2.3.4. Settlement agreements generally include a prohibition on the use of the employer’s confidential information after termination. Whilst confidential information is protected by equitable duties after the employment has terminated, it is valuable to have an express clause to make clear what information is protected, particularly if there are specific business processes and information which the employer seeks to protect. The settlement agreement will also include provision for the employee to return any confidential information and/or irrevocably delete it from his or her computer and phone and to return electronic devices belonging to the employer. The importance of the court upholding confidentiality provisions properly entered into as part of a settlement, where there has been legal advice and no pressure to enter into the agreement, has recently been re-stated by the Court of Appeal in ABC v Telegraph Media Group Ltd [2019] EMLR 5.

2.3.5. It is worth emphasising that the employer cannot, by reference to any contract term, seek to exclude the operation of the whistleblowing provisions of the Employment Rights Act 1996 (“ERA”) (see s.43J ERA). This is a limit to the employer’s ability to prevent the divulging of confidential information via a settlement agreement.

MORE INFORMATION / PURCHASE THE BOOK ONLINE

1 This is the agreed statement of principle which was adopted by the Judge in Re-Use Collections v Sendall [2015] IRLR 226