Legal 500 and Chambers & Partners ranking for Pharos Legal, restrictive covenant developments and case-law round-up

It has been a busy few months for Pharos Legal.

We have been acting for clients on a range of matters – from drafting and rolling out new contracts and handbooks, to assisting in carrying investigations into allegations of gross misconduct, handling unfair dismissal claims and litigating restrictive covenant issues.

Restrictive covenant cases are, we are finding, on the increase. In these straitened economic times businesses seem to be taking action in circumstances where perhaps they wouldn’t otherwise have done – and this is why the couple of cases that we have referred to below are particularly relevant to our practice at the moment and will hopefully be of interest to you. They certainly underline the importance for businesses of reviewing the restrictive covenants in an employee's contract when they are promoted and making sure the employee signs and returns the new contract.

We are also proud to tell you that we have again been recognised for the work we are doing for our clients. We have been ranked in both leading UK leading directories – Chambers & Partners and The Legal 500 – which is hugely satisfying for a young team of our size. It is particularly gratifying because the rankings are dependent upon our clients and peers giving positive feedback about what we do and how we do it to independent researchers. We are very grateful to our clients for giving their time to support us and speak to the researchers – thank you!

Lastly, our Practice Manager and right-hand woman Adele was shortlisted for Legal PA of the Year. Whilst she didn’t win (and it was hugely competitive even to be shortlisted, so that alone was a great achievement) we took the opportunity to go down to London as a team and enjoy the awards dinner together.

Recent High Court cases - restrictive covenants in employment contracts

In the first case, the employee's original employment contract (entered into in 2000) contained a one month notice period and a 12 month non-compete clause. In 2005 the employee was promoted and his notice period was increased to three months. He was sent a letter confirming the changes and signed an acceptance letter in the following terms:

“I agree to the variation of my terms with [the company], which are stated in this letter and I acknowledge and agree that all the other terms and conditions outlined in my original documentation remain unchanged.”

In April 2012 the employee gave notice, indicating that after his resignation he would be joining a company that operated in broadly the same market as his employer.

His employer wrote to him confirming that they would regard him as being in repudiatory breach of his employment contract if he went to work for the competitor. The company sought an injunction, seeking to enforce the non-compete clause. The employee counterclaimed for wrongful dismissal. The court refused to grant the injunction and allowed the counterclaim, deciding that a 12 month non-compete clause could not be justified in the case of an employee with the status and responsibilities that the employee had at the time it was entered into in 2000.

Whilst this is by no means a new principle, the decision reaffirms that the reasonableness of a restrictive covenant must be judged at the time it was entered into, not at the time when the employer sought to enforce it. Even a subsequent change of circumstances, such as a promotion, could not turn an invalid covenant into a valid one. When varying an employee's contract, therefore (particularly if the employee is being promoted), businesses should review any restrictive covenants and decide whether they need to be revised or entered into again. It will not be sufficient to get the employee to acknowledge that "previous terms remain unchanged".

In the second case, an employee was given a new contract containing restrictive covenants after he was promoted. However, he did not sign and return the contract, simply filing it away in his desk drawer. When he resigned with the intention of joining a competitor, his employer sought to rely on the restrictive covenants in the unsigned contract. The court held that the employee was bound by the terms of the new contract, including the restrictive covenants, but only because he had applied for private health benefits which he was only entitled to under the new contract. Although the employer won in this case, it highlights the importance of making sure employees sign and return new contracts issued on promotion as if the employee had not applied for the private health benefits, he would not have been deemed to have accepted the new contract and his employer would have had no protection.

If you would like a checklist setting out what restrictive covenants are, when they are likely to be enforceable and how they can be used in employment contracts to protect businesses’ interests please get in touch.

Case and consultation round-up