Breach of contract – or not?
Restrictive covenants in employment contracts are frequently the cause of disputes and have been described by Lord Justice Underhill as “the most powerful weapon in the employer’s armoury”.
This is because of the potentially significant impact they can have on employees’ activities after leaving a job. However, despite being included as a standard term in most employment contracts, the guiding principle regarding enforceability is that they must be no wider than is reasonably necessary to protect the employer’s legitimate commercial interests. Increasingly, courts have come to construe them narrowly, as a recent High Court decision demonstrates.
In Threlfall v ECD Insight Ltd, an ex-employee claimed a larger equity share in his former employer’s business and, in response, the employer counterclaimed that the employee was in breach of his restrictive covenants. Under the contract of employment, Mr Threlfall was entitled to a share in the equity of ECD in addition to his salary. This was dependent upon a period of minimum service and the contract also stipulated that if he left the company to pursue competitive activities, the equity share provision would be void. During his time at the company, Mr Threlfall developed a sideline in providing services in event mediation. When he left to work for Reuters news agency, he continued with event mediation in addition to his main job with Reuters. ECD alleged that this was in breach of the terms of his contract and therefore refused to pay the equity share.
The court ruled that Mr Threlfall had not left his job for the sole purpose of continuing to provide event mediation and therefore found that he had not forfeited his entitlement to his share. More importantly, the court applied the 2010 decision of Phoenix Partners Group LLP v Asoyag and ruled that, as no one else provided the mediation services at ECD after Mr Threlfall left, the company could not claim that he was performing activities which impacted upon their business.
This case is of particular relevance to small employers where there may only be one person performing certain tasks in the business. Restrictive covenants are a complex and increasingly litigious aspect of employment contracts and should always be drafted in a manner which balances the interests of the company with the rights of the employee to seek employment in their area of expertise.
For more information please contact our employment law team.