A restrictive covenant in an employment contract usually means a restriction which prevents unfair competition by the employee after their employment ends.  Courts will impose strict limits on this type of restriction.

To the extent that restrictions go beyond protecting the legitimate business interests of the employer, they will be void and unenforceable.  The problem is knowing how far is too far in the particular circumstances.

Problems commonly arise when employers have an urgent need to impose new covenants. For example if your company is losing business, suppliers or staff to a competitor, can you impose new restrictive covenants on your employees to prevent further damage if they leave; and what happens when your company dismisses employees who refuse to sign the new restrictions?

If a court rules that the restrictions were too wide to be valid, does it follow that the dismissals were necessarily unfair?

According to previous case law, the answer to this last question was ‘yes’.  There could be no ‘potentially fair reason’ for dismissal where the restrictions sought were too wide.

This case law has now been overruled by the Court of Appeal in Silverwood-v-Windsor Recruitment.  An employer doesn’t necessarily lose unfair dismissal claims because the restrictions it seeks to impose go too far.

The Facts

Ms Silverwood was one of a number of employees dismissed by Windsor Recruitment for refusing to agree to new restrictive covenants.  Windsor Recruitment had suffered when former employees set up in competition and urgently sought to impose new covenants on its remaining employees to prevent them from defecting.

Initially, the director involved dealt out contracts containing new restrictions ‘as one might deal out a pack of cards’ and gave employees only 30 minutes to consider and sign them.  Although he eventually relented and allowed employees a number of days to consider the new terms, Ms Silverwood was threatened during this subsequent period with the loss of commission if she did not sign the contract. 

After around 10 days the company attempted to force the issue.

The director involved behaved in an ‘aggressive and intimidating’ manner and when Ms Silverwood attempted to rearrange a meeting with him for later in the day to discuss the covenants, he replied: ‘I couldn’t give a shit, you are in next.’

When he did meet with her he described the employees who were continuing to object to the covenants as ‘silly girls playing unions’.

None of the employees were formally warned that dismissal might result from a refusal to sign up to the new contracts.  However, all that refused were eventually dismissed.

Could Windsor Recruitment argue the dismissals were fair in these circumstances?

The Law

The starting point for the Court of Appeal was the legitimate need for employers to impose restrictive covenants on their employees in certain situations.  Employees ‘must accept reasonable steps to that end, as part of their duty of co-operations with their employer’.

The court then considered the scope of the restrictive covenants, which were too wide and unenforceable.  Importantly, however, the court said that this didn’t conclude the argument by making the associated dismissals unfair.  Instead, the court said a potentially fair reason, (‘some other substantial reason’) would normally be made out unless the reason given by the employer was ‘whimsical or capricious or dishonest’ or was otherwise for a clearly illegitimate reason (for example based on race or sex).

The width of the covenant would then be assessed by a tribunal as part of a broad range of factors when assessing if dismissal was fair in all the circumstances.  These are likely to include the urgency of the need to impose covenants, the degree of prior consultation, and whether there was clear notification to the employees that a failure to agree to the terms of the new covenant may result in dismissal.

In common with other contractual changes that an employer might seek to make a good business reason for the change will normally get the employer past ‘first base’ and establish a potentially fair reason for dismissal.

Is dismissal fair?

The question for the tribunal will be whether dismissal was fair in all the circumstances, when clear consultation and a fair procedure will be paramount.

Unfortunately for Windsor Recruitment, the success of their initial arguments was something of a hollow victory.  Whilst they had clearly demonstrated a potentially fair reason for dismissal, the process by which they imposed the covenants on their employees was, unsurprisingly found to be procedurally flawed, and the dismissals were accordingly unfair.

Clearly, best practice employers will continue to seek to impose appropriate restrictive covenants early on in the employer/employee relationship.

Whilst this decision is helpful for employers seeking to impose a change, any employer seeking to impose covenants in Windsor Recruitment’s position would be well advised to carry out clear and thorough consultation.

Summary

Restrictive Covenants impose restrictions once employment ends and there are strict limits as to how far restrictions can go.

They can only protect legitimate business interests – anything else is void and unenforceable and new case law allows the imposition of new terms – but only so far.

The covenant will still be tested for fairness and companies should seek good legal advice before creating and imposing terms.

Clive Day is a solicitor at Eversheds LLP.