Post-termination restrictions - consideration reconsidered?

01 July 16

It had been generally accepted that an employer who wished to introduce post-termination restrictions after an employee has commenced employment would have to provide a tangible benefit (e.g. a pay rise). This principle, however, has been cast into doubt after two High Court decisions in June 2016 which appear to go against the grain of previous case law.

The first of the cases was Pickwell & Nicholls v Pro Cam CP Ltd, as discussed in 'Doing a deal – introducing enforceable post-termination restrictions', which took the view that providing employees with the opportunity to progress in the their careers through continued employment and access to clients was sufficient to achieve a binding agreement.

Pro Cam might have been seen as an anomaly; however the decision in Decorus Ltd v Penfold & anr suggests a trend towards a relaxation of the principles governing whether an agreement has been reached. This judgment appears to hold that benefits provided prior to the introduction of new post-termination restrictions can be treated as being in exchange for the employee signing up to the new restrictions, thus making enforcement possible. This possible trend would be welcomed by employers seeking to protect their business by contractual restrictions, particularly where there is doubt around the process leading up to the agreement of the restrictions in question.

Facts

In Decorus, an employee (Mr Penfold) left his employer (Decorus) in order to set up in competition on his own, in breach of his post-termination restrictions.

Having begun work for Decorus in 2012, Mr Penfold was later given a new contract containing new restrictions, which he signed at the end of May 2013. More than a month earlier, Mr Penfold had been given a pay rise following an appraisal. This was expressed by the employer to be part of a three phase process, encompassing an appraisal, possible actions after the appraisal, and the issuing of an updated contract of employment. Mr Penfold argued that since the pay rise had been awarded before the new contract was signed, this could not be treated as his side of the exchange needed for an agreement.

Decision

The court found that when taken together, the appraisal, pay rise, and continued employment did amount to valid consideration for the 2013 contract. They were always expressed to be part of a three phase process, beginning with the appraisal, of which the new contract and the salary increase were both a part. Surprisingly, it decided that it did not matter in which order the signing and the pay rise came, as they were both part of this process. The 2013 contract therefore applied to Mr Penfold, and the post-termination restrictions were enforceable.

Mr Penfold had repeatedly breached his duty of loyalty to Decorus, having actively made preparations to compete with them whilst still in their employment. This could be seen as a case where the court has stretched its interpretation of the law in order to achieve a 'just' result.

Future

Whilst the decision in Penfold could prove advantageous to employers in a similar position seeking to enforce post-termination restrictions, it would be premature to rely on its principles unless and until they receive further judicial approval. The prudent approach for employers remains to introduce post-termination restrictions from the beginning of the employment relationship, when providing the employee with the job itself unambiguously qualifies as the tangible benefit given from the employer's side. Restrictions should be updated during the course of employment as required (eg to address an employee's exposure to a different part of the business).

When introducing or amending restrictions during the employment relationship, this is best done on promotion or with a pay rise, whilst explicitly setting out in writing that the promotion or pay rise is conditional on the employee agreeing to such restrictions.

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