Ask Auntie - Enhancing terms and conditions at bonus time

January 19, 2015

Dear Auntie,

The usual rounds of bonuses and promotions are coming up in the new year. Is there anything I should consider from an employment contract perspective in conjunction with this?

Thanks!
Keene As



Dear Keene,

Good question! It is great that you are thinking ahead. It is worth using this opportunity to take stock and do some house-keeping.

Changing contractual terms

Now is the time to consider whether you need to update contracts and/or make changes. Things like reducing the level of benefits or introducing mobility clauses are best done in conjunction with a promotion or bonus. This acts as an incentive for employees to sign up to a new contract particularly if you make the promotion/bonus conditional upon its signature. Click here for more details regarding the making of contractual changes.

You might wish to update contracts to reflect recent changes to legislation and case law, such as the recent cases, which have indicated that notice periods can be enforced against employees. In relation to this development in the case law, we would suggest an express clause allowing an employee to be given different duties during their notice period (such as not being able to contact clients and effecting a handover).

Unsigned contracts

Check whether there are any employees in relation to whom you do not have a signed employment contract on file. Again - now is the time to ensure that they sign up as you can make the bonus/pay-rise conditional upon them doing so.

Restrictive covenants

Promotion and bonus time is also great for making sure that your Company is protected by appropriate post-termination restrictions. There are a number of reasons for this:

Consideration

If you are trying to introduce or up-date an employee’s restrictions, without “consideration” from the employer, which broadly means “something in return” (e.g. a pay-rise, bonus or promotion) those restrictions will not be enforceable. This was the issue in a recent case: Re-Use Collections Ltd v Sendall & Anor. In this case, Mr Sendall had worked for Re-Use (a glass recycling business) for some time. He had no written contract of employment, and no post-termination restrictions. After some time he was asked to sign a new contract of employment which included a number of post-termination restrictions. The High Court found that the restrictions were unenforceable since Mr Sendall had not received "some real monetary or other benefit" for the change in his contractual terms.

As a consequence, the best time to introduce such post-termination restrictions are when you are already providing a bonus, pay-rise or promotion, all of which can be expressed to be “consideration”.

Promotions

There are a number reasons for considering restrictions on promotion:

  • the employee may not have any post-termination restrictions in place if these were not relevant in a more junior role. It is important to consider whether this might now be appropriate, rather than finding a very senior long-serving employee does not have any restrictions in place when they are just about to join a competitor;

  • a court will look more widely than one particular employee when considering enforceability. It is important that all those of a particular seniority or a similar level of access to clients and/or sensitive information have similar restrictions in place. For example, if you have a historic employee with no restrictions, this will undermine the enforceability of restrictions in relation to other newer employees of a similar seniority; and

  • restrictions may need updating. This is a constantly changing area of law, and in order to ensure that restrictions are enforceable, it is important to ensure that the wording is up-to-date;

  • reasonableness of a restriction (and therefore enforceability) will be assessed as at the time that the contract was entered into rather than at the time when enforcement is being sought. An example would be a contract containing a 12 month post-termination non-compete for a junior employee such as an office assistant. Even if this employee was promoted to CEO (and the restriction might then be justifiable) the reasonableness would be measured as at the date of joining in the role of office assistant. If you do find that this is the case, perhaps use the opportunity to ensure that you have an updated contract (including new restrictions) in place, or at the very least ask the employee to re-sign the contract on promotion so that you have put a line in the sand as at promotion.

Please let us know if you need help drafting enforceable restrictions.

Yours sincerely
Auntie


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