Post Termination Restrictions: Always Consider Consideration

UK Employment Alert

The recent case of Re-Use Collections Ltd v Sendall [2014] EWHC 3852 (QB) is a timely reminder to employers everywhere of the importance of providing meaningful consideration when attempting to tie-up existing employees with new post-termination restrictions.

If you don't, the risk is that no matter how well drafted your restrictions are, they will be worthless when you come to enforce them, allowing your – by now – ex-employee to walk away scot free to compete with you, pinch your staff and cajole your customers away.

The facts

Mr Sendall had worked for Re-Use Collections for a number of years with a basic written statement of employment particulars in place (despite his seniority and importance to the business). Eventually Mr Sendall was asked to sign a new contract which contained a number of post-termination restrictions (including a non-compete, non-solicitation of clients and employees, non-dealing with clients and a ban on setting up a competing business). He was not keen to sign up to the new contract and sought legal advice, before eventually signing, a number of months later.

Mr Sendall then left Re-Use. The circumstances around his departure are too lengthy to go into here, but suffice to say that he was accused of working to set up a competing business with his sons and poaching Re-Use's clients and suppliers into the bargain. Matters came to a head in a heated disciplinary meeting with Re-Use, and Mr Sendall resigned.

The dispute

The two parties then became embroiled in a lengthy and costly legal dispute around Mr Sendall's behaviour. A court granted Re-Use an interim injunction, and eventually the matter came to a full hearing. The Judge, who did not have any complimentary things to say about the parties, made findings on a wide range of matters, including Mr Sendall's implied employment duties, alleged fiduciary duties, contractual duties, and a counter-claim by Mr Sendall for constructive dismissal (which failed).

For our purposes, the key finding that the Judge made was whether the restrictions contained in Mr Sendall's contract were enforceable by Re-Use against him. In reaching the conclusion that they were not, the Judge focussed on the lack of meaningful consideration from Re-Use for the restrictions which had been introduced during employment, and held that this meant they were unenforceable. The Judge made this finding despite holding elsewhere that Mr Sendall had breached his duties and contractual terms in other respects, and awarding Re-Use damages of over £50,000.

The law on consideration

Given Re-Use's success on most of its claims, why was consideration such a big issue and how did it lose this point?

When a new joiner is offered a contract of employment that contains post-termination restrictions, the job offer in itself is sufficient consideration to ensure the restrictions are binding (in theory at least; note this doesn't guarantee enforceability).

But what about existing employees? If you are changing an existing employee's terms to include new, or even to strengthen, existing restrictions, you will need to offer consideration in return for them to be binding. This is a quirk peculiar to post-termination restrictions. Usually when you vary existing employees' terms and conditions, their continued employment is sufficient consideration. For post-termination restrictions, however, separate consideration is essential and one of the many hurdles of enforceability.

Re-Use failed to unequivocally grant consideration in return for the restrictions it introduced. The restrictions failed as a result.

Practical considerations

So what should you do to avoid Re-Use's mistakes?

  1. Make sure you offer consideration if putting in place new restrictions for a current employee – and the easiest form is going to be a one off cash payment. Remember this isn't necessary for a new employee – the employment offer itself functions as the consideration in those circumstances;
  2. There is a long-running debate on what amounts to "adequate" consideration that we won't bore you with, but the recommended approach is to ensure that the consideration is going to be worth it to the employee. So not £1, and probably greater than £200;
  3. Alternatives to cash payments could be explicitly tying the restrictions to the offer of a new benefit, lump-sum pension contribution, promotion, or pay rise which you may have been about to give the employee anyway;
  4. Explicitly state what the consideration for the restrictions is in the contract or variation letter – it should be completely obvious to the employee signing up; 
  5. Remember to make good on the consideration offered, and keep evidence of that; and 
  6. Bring the consideration and the restrictions to the employee's attention as clearly as you can.

Re-Use's carelessness cost them thousands of pounds in damages they failed to obtain and legal costs they had to spend trying to get them; and it could all have been avoided, with a bit of consideration.