So, you hire a new employee and get them to sign up to a contract of employment. That’s your job done on the contract side of things. Or is it?
Many employers can fall into the trap of having an employee sign a contract at the start of their employment and not think about this again – no matter how long the employee is with them.
This can lead to a situation where an employee has been employed by a company for years, has been promoted on numerous occasions but the contract is not updated to reflect the employee’s seniority. If the relationship ends badly and the employer wants to rely on certain clauses, it can turn out the contract governing the relationship is so out of date that many of the clauses are not relevant, or the clauses it expected to see were not there.
This is particularly important if a company is seeking to rely on restrictive covenants to prevent an employee going off and working for a competitor, taking clients, or perhaps taking key employees.
There have been several cases recently that have highlighted the importance of companies reviewing contracts of employment regularly, and considering restrictive covenants when employees are promoted.
In one particular case the High Court highlighted the importance of having an updated contract signed, rather than a copy just being filed away as ‘paper work’.
In the case of FW Farnsworth Limited and another v Lacy and Others, Paul Lacy was initially employed by Northern Foods in 2000 as a technical graduate. He was then promoted in 2003, where he signed his first contract of employment.
The 2003 contract did not contain any post-termination restrictive covenants. In April 2009 Mr Lacy was then promoted again, this time to a senior manager. He was sent a new contract of employment. This contract of employment contained post-termination restrictive covenants. Mr Lacy never raised any objections to the terms of the contract, but it was never signed. After Mr Lacy’s promotion he applied for private medical insurance, this was a contractual benefit provided for in the 2009 contract.
In March 2012 Mr Lacy resigned from Northern Foods to join a competitor. Northern Foods raised an action in the High Court to enforce the post-termination restrictions in the 2009 contract. These restrictions prohibited Mr Lacy from working for a competitor for six months.
The question the High Court had to determine was whether, by not signing the 2009 contract, Mr Lacy was bound by the post termination restrictions. The Court’s decision was that although he had not signed the contract, he was impliedly bound by its terms.
The Court found that although the contract had never been signed, Mr Lacy was bound by the restrictive covenants because he had shown his intention to be bound by the terms of his contract by exercising his contractual right to private medical insurance.
If Mr Lacy had not applied for the private medical insurance it is likely that the Court would have reached a different conclusion.
It is always good practice to ensure that any new contract of employment is signed following a promotion or a change in role. This will ensure that there is no doubt about an employee not understanding the terms and conditions that attach to the new role.
To avoid getting into a situation where there is a dispute as to whether any new terms and conditions apply to a promotion, and to ensure that employers will be able to enforce restrictive covenants included in a new contract of employment, employers should consider the following points:
1. Once a new contract of employment is issued, make sure that a signed copy is returned by the employee.
2. Make sure that any covenants are reasonable. If a restrictive covenant is too wide in terms, or not specific to the individual employee, a court may find that it is unenforceable. This applies whether a contract is signed or not.
3. If an employee is promoted, consider the original contract of employment and determine whether a restrictive covenant is appropriate to protect the business, or whether the current covenants need expanded upon.
It is important to remember that the contract of employment is a living document. As an employee’s status in a company changes, the contract of employment should reflect this change.