Employment Law – Narrowing the goalposts: Forshaw and Restrictive Covenants

The problem that this article addresses is: what happens when an employer seeks to introduce post-termination restraints into a contract after it has already commenced?

Sensible employers, properly (and sensibly) advised, include post-termination restraints in the contracts of their employees at the time of engagement and before any employment begins. This is desirable so that the employee knows exactly what his position is right from the start. Such timing also avoids the problem dealt with in this article. In this context, and for present purposes, it is assumed that the employer has a legitimate business interest which requires protection.

Consideration, or more precisely the lack of it, is frequently thought to be the primary stumbling block when an employer later seeks to enforce a covenant introduced after the commencement of an employment contract. This hurdle will be overcome if at the same time as the restraints are introduced the employee is also receiving some benefit, such as improved working conditions, a better salary or an enhanced package. Failing a pay rise, a single bonus payment will usually suffice.

The other crucial element is the consent of the employee to the change. This can be express or implied. Without consent, a newly introduced covenant will have the status of a unilateral variation of contract and thus be unenforceable. It might also trigger a resignation and a claim for constructive dismissal.

Best practice dictates that the employer produces a signed document evidencing the consent of the employee. A less attractive and more uncertain approach (but one not uncommonly adopted in larger companies) is to bury any change to existing covenants (or even the first introduction of them) in a staff handbook. This is accompanied by a notice, asking employees to find the time to read the changes in the handbook because of their importance and providing, absent any queries or concerns being raised within one month, that each employee is “to be treated as having accepted” the new terms. This was the approach successfully adopted but not recommended in Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450.

Having failed for whatever reason to introduce covenants at the start, the sensible employer, adopting best practice, asks for the employees’ express written consent. If he gets it, and consideration is provided, no difficulty arises. He may, however, have to confront a situation where the employee refuses. This was the position challenging the employer in Forshaw v Archcraft Ltd [2005] IRLR 600.

The employer was a small company with some 13 employees. Two senior employees (one of whom was related to the three claimants) had already left to set up in competition with the employer. Fearing that the others might leave, the employer asked the Claimants to “commit” themselves to the company and sign new contracts of employment, containing a restraint of trade clause imposing a nationwide ban on their working in a competing business for 12 months following termination. The Claimants refused. So what was the employer’s plan B?

It dismissed the Claimants. Their complaints of unfair dismissal were rejected by the Employment Tribunal, which decided that the refusal by the Claimants to commit themselves to the employer by signing new contracts constituted “some other substantial reason” for their dismissal within the meaning of s.98(1)(b Employment Rights Act 1996 and that in the circumstances the dismissals were fair. Significantly and interestingly, the ET found that the proposed restraint on their post-termination activities “was doubtless wider than necessary”.

The EAT allowed the Claimants’ appeal, held the dismissals unfair and remitted the complaints to a freshly constituted Tribunal to determine remedy. The key finding in the EAT judgment was that it was unreasonable of the employer to ask an employee to sign up to a restraint which was unreasonably wide and which purported to impose an unreasonable fetter on the employee’s future trading activities. It would, if tested on an injunction hearing, have probably been found to have been void and unenforceable. As such, a refusal to sign a contract containing such a term could not be accepted as a potentially fair reason for dismissal. In making this finding, the EAT had no difficulty in answering a similar question left open in an earlier EAT case, RS Components v Irwin [1973] IRLR 239.

Now the predicated properly advised employer will not of course try to introduce an unreasonably wide provision. So what options does that employer have when an employee, during the currency of his contract, refuses to sign up to a reasonable and potentially enforceable post-termination restraint? Well if it’s “commitment” that the employer is after, a minimum fixed period of employment would be acceptable, as the EAT held in Forshaw. But of course the employee could not be compelled to adhere to it – though if he left early he would be liable for damages for breach of contract. This would also, of course, do nothing to address the problem of or inhibit competitive and damaging activity post-termination.

The only other less than satisfactory course is simply to dismiss the employee and rely on his refusal as a potentially fair ‘other substantial reason’ for dismissal. But even this option may not be open to the employer, absent some evidence of actual or imminent disloyalty or other threatened competitive activity of the type found in the Forshaw case. The context of the threatened disloyal competition seems critical to the EAT’s thinking on this issue.

So to end where we started: that the sensible and properly advised employer should insert any required post-termination restraints before the contract commences remains advice of universal application.