Restrictive Covenants and Employee Promotion

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Promoting an employee can create more business for your business.  However, what happens if the relationship between you and senior employee fails?  

Can you stop your senior employee from soliciting your business’ clients, current employees and suppliers? The short answer is yes but it depends on what you had done with the employment contract on promotion of that employee.

The Mercantile Court in the case of Safetynet Security Ltd v Coppage and another [2012] EWHC B11 (Mercantile) enforced a very wide six month post-termination restrictive covenant which prevented a director from soliciting anyone who was a customer or client during his entire period of employment in Safetynet.

The Court, which was heavily critical of the director’s evidence, rejected an argument that the covenant should have been restricted to customers with whom the director had had dealings over the last 12 months of his employment. The Court found that the covenant was appropriately drafted, given the director’s seniority and the integral role he had within the organization (he was considered to be the “face” of the Company), and the relative small size of Safetynet’s client base. These two factors made the restrictive covenant reasonable on the facts of the case.

Contrast this with the case of Patsystems Holding Limited v Neilly where Mr Neilly started with Patsystems in 2000 in a junior role and in 2005 was promoted to a Director of Global Accounts. On his promotion, his employment contract was varied in terms of his salary and his notice period but all other terms were stated to remain the same. One of those terms was a 12-month restrictive covenant restraining him from competing with Patsystems. The Court in this case held that the covenant was invalid at the time it was entered into in 2000 because a 12-month non-compete covenant for a junior employee was not enforceable. A restrictive covenant is evaluated at the time it was entered into and the circumstances at that time.

It is important for employers to remember that when you are promoting an employee, you should consider these key points:

1. Do you need to amend the terms of the employment contract in its entirety to suit the position that the employee has been promoted to?
2. Do you need to include a restrictive covenant on the employee’s promotion? Or, do you need to review and re-state such covenants when the employee is promoted to ensure that they remain enforceable?
3. Is the restrictive covenant reasonable taking into account the nature of the job, the employee’s position and his duration of employment to date?

If you are an employer, you are strongly advised to check the employee’s covenants when you promote him. You should not adopt a one-size-fits-all approach and should look at and tailor such covenants in the context of both the specific individual, his new role and its effect on your business.

If you would like us to review such covenants, or to assist you, do contact us.