Can unenforceable restrictive covenants be rendered enforceable by an employee’s promotion?

November 12, 2012

Job promotions are ideal opportunities to get employees signed up to new or improved restrictive covenants but can a promotion itself turn an employee’s existing unenforceable restrictive covenants into enforceable ones?  hrlaw looks at the recent High Court decision in PAT Systems v Neilly.

Background

  • Mr Neilly joined PAT Systems in 2000 as an account manager.  His contract contained a 12 month non-compete restrictive covenant.  In 2005 he was promoted to Director of Global Accounts and his salary became more than double what it had been when he first joined.  His notice period also increased from 1 month to 3 months.  He signed a letter confirming his agreement to the changes in salary and notice period and agreeing that “all the other terms and conditions…remain unchanged”.
  • In 2012 he resigned to join another, similar company.  His resignation led to a High Court hearing to determine whether the restrictive covenant was enforceable.
  • The enforceability of restrictive covenants depends on whether they were justifiable at the time they were entered into – and to be justifiable they must go no further than is reasonably necessary to protect the employer’s interests.

Issue

  • Was Mr Neilly’s non-compete covenant entered into in 2000, when he first joined the company, or in 2005, when he signed the letter confirming his agreement to his existing terms and conditions upon his promotion?

The arguments

  • Mr Neilly argued that his covenant was entered into in 2000 when he was a mere account manager, that the covenant was unenforceable then and therefore remained so at the time of the hearing.
  • PAT Systems argued that the covenant was entered into in 2005 when he signed the confirmation letter upon his promotion and that the covenant was enforceable then and at the time of the High Court hearing.

The High Court’s decision

  • The Court held that the covenant was unenforceable in 2000 when Mr Neilly joined the company – it could not be justified given his status and responsibilities at the time.  His promotion did not render it enforceable.  Therefore the only chance of it being enforceable was if he had entered into it (again) in 2005. 
  • The Court found that the simple confirmation letter he signed in 2005 was not enough to be classed as “entering into” the covenant.  This would require either express confirmation by him of the covenant or him signing an entire new contract containing the covenant.

Comment

  • Job promotions remain ideal opportunities to get employees signed up to restrictive covenants but this case shows that going about it in the right way is key. 
  • Employers need to obtain the employee’s express confirmation of existing restrictive covenants (if these are appropriate) or get the employee to sign a new contract containing appropriate covenants.  

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