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Restrictive covenants in Employment contracts

publication date: Oct 17, 2006
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author/source: Clive Day
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The law on when an employer can fairly dismiss an employee for refusing to agree to restrictive covenants has been changing recently. This article reports on what happened at a recruitment agency but the very same situation could occur in any estate agency. Clive Day examines the current position following a recent change in the law - employers take note!

The Difficulties of Imposing Restrictions

By way of reminder, a “restrictive covenant” in an employment contract is usually taken to mean 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 business 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 re-arrange a meeting with him for later in the day to discuss the covenants he replied “I couldn’t give a ****, 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 was 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-operation 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 (eg. 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.

A Lesson Learnt?

In summary, 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. The question then 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.

Clive Day is a trainee solicitor at Eversheds LLP.

REVISED CRE CODE OF PRACTICE ON RACIAL EQUALITY IN HOUSING

We have come a long way since the introduction of the Race Relations Act in the sixties. People can no longer be turned down for housing because of their colour, but racial discrimination is still shaping the lives of many in our communities. The Commission for Racial Equality (CRE) has published a new code of practice for providers of housing and housing related services to address racial inequality across the country. The code came into effect on 1st October.

All organisations and individuals in the housing business need to take the code’s recommendations into account – from estate agents and private landlords to local authorities and housing associations. Throughout the drafting process the CRE consulted widely to ensure that the recommendations were practical. This included setting up an advisory board of representatives from across the housing industry, including the National Association of Estate Agents (NAEA) and the Association of Residential Letting Agents (ARLA). While the panel found that the majority of estate agents were already acting responsibly, feedback suggested that clear guidance would help agents to understand and address the issues.

Welcoming the guidance, Peter Bolton King, Chief Executive of the NAEA, commented: “Designing the code to be a practical document with workable solutions was a priority for the board. We now have clear guidance which offers the potential to address racial inequality without being an additional burden on the sector.”

The guidance is broken down into two sections. It sets out what estate agents need to know about discrimination and then makes recommendations about how to avoid costly legal action (as a statutory document the guidance can be referred to by courts in race discrimination cases).

For example, an estate agency makes assumptions about the type or location of properties that black British buyers are interested in and withholds information about properties that, in usual practice, they would give to white British buyers. This is unlawful and constitutes direct discrimination. Indirect discrimination, which is also unlawful, may occur when a landlord sets conditions on lettings that in practice exclude one racial group more than others and for which there is no legitimate business reason. An estate or lettings agency which carries out a landlord’s instruction of this kind would also be acting unlawfully.

The steps recommended by the code to prevent discrimination and to promote equal opportunities are mostly common sense. They help agencies to provide services fairly within a multi-racial society, and promote estate agents’ business interests by ensuring a wide choice of suitable tenants strengthening their reputation for equal treatment. Key recommendations for lettings and estate agencies include:
• have a written equal opportunities policy or statement stating how they will ensure fair and equal services
• make the statement readily available to buyers and sellers, applicants, landlords, tenants and contractors
• give a sufficiently senior person responsibility for putting the policy into effect
• make sure that staff are aware of the company’s policy and understand what constitutes racial discrimination and how to avoid it
• check that the methods and criteria used to provide information to potential tenants and buyers are not biased against some racial groups or favour others, and that tenancies are as widely advertised as possible
• if appropriate, keep records of the ethnic origin of, for example, applicants and use them to check that systems are operating fairly

To find out more about the CRE code including a shortened summary for landlords and other private sector bodies or to download a copy go to the CRE website at www.cre.gov.uk/gdpract/housing_code.html