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Ask the expert: Restrictive covenants

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This week the experts, Adam Partington and Esther Smith advise on whether a company can cancel any unpaid salary or bonus if a restrictive covenant is breached.

 

 

The question: Restrictive covenants

Does anyone know if a company can state that they will cancel any unpaid salary or bonus if a restrictive covenant is breached?

I am wary of including this in a policy as I don’t feel it can be legally enforced. I don’t feel we can justify withholding salary in these circumstances.
 

Legal advice:

Adam Partington, solicitor, Speechly Bircham

Generally speaking, restrictive covenants are enforceable provided they are reasonable. If they are not reasonable then a Court is likely to hold that they are invalid as being in restraint of trade. If an employer does not have legitimate interests that it needs to protect from an employee, then it is not going to be able to enforce restrictive covenants against them. If it does have such interests, then any restrictive covenant it imposes must not be more than is adequate to protect those interests in the circumstances.

Against this background, there are issues with imposing the conditions you have suggested – namely withholding any unpaid salary or bonus in the event of an employee’s breach of their restrictive covenants. Such conditions may suggest the parties have agreed a value for the breach, which could make it more difficult for an employer to justify seeking an injunction against the employee if it needed to. They may also amount to a penalty clause which would make them unenforceable in that they may not represent a genuine pre-estimate of loss that the employer would suffer in the event of the employee’s breach. They might also be viewed by the Court as making the covenants unreasonable, which would undermine their enforceability.

You also appear to be suggesting that the covenants are dealt with in a “policy”, rather than in the employees’ contracts. This approach raises a number of issues. Does the policy have contractual force? If you simply impose changes in a policy, they could well be ineffective. In imposing such changes unilaterally you also run the risk of constructive dismissal claims. Furthermore, given that restrictive covenants need to go no further than necessary to protect an employer’s legitimate interests, a “one size fits all” set of restrictive covenants in a policy is unlikely to meet this fundamental requirement.

This is a tricky area and it is therefore important that you seek specific, tailored legal advice so that the restrictive covenants are drafted for the particular circumstances and in such a way as to minimise these risks. The drafting would need to address, among other things, the nature of your business and what the employee does. You would also need to consider how to introduce the covenants (or implement any changes to existing covenants) so that such changes are effective contractual changes.

Adam Partington can be contacted at Adam[email protected]. For further information, please visit www.speechlys.com.

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Esther Smith, partner, Thomas Eggar

This would be a tricky thing to include in a contract or policy document. You should however have in your contracts a general provision allowing the employer to recover from the employee’s salary any sums owed to it by the employee, whether by reason of overpayment, loan or otherwise. This in theory allows you to withhold money from salary in respect of any sums due to you, but in practice it is going to be difficult to show that a breach of any covenants gives you an entitlement to a quantified sum.

The first hurdle of course is establishing that your covenants are enforceable against the employee in any event, which is not always a straightforward issue. If they are, the next question is whether you have any real evidence that the employee has breached the covenants. If you do, then you may well be on the way to taking proceedings against an employee either for an injunction, to stop them acting in breach or, more usually, for damages arising from their breach. This can be where the practical issues arise, as just because an employee has breached the covenants does not necessarily mean the employer will have suffered any financial loss or indeed any quantifiable financial loss.

Therefore even if you were to include such a provision in the agreement regarding salary, you may not be able to ascertain what sums you had the right to deduct, so in all I would suggest it is fairly pointless.

The issue on bonus is slightly different (wages and salary have special protection under the law, which often does not apply to contractual benefits). If an employee has acted in breach and you owe them money for a contractual bonus entitlement, if you don’t pay it to them they will most likely bring a claim against you for breach of contract. If they do, you have the ability to counterclaim for the breach they have given rise to. Again you need to establish that the contractual terms are themselves enforceable and that you have suffered loss, but if you can demonstrate both points, it may be worth taking the risk and withholding the bonus to see what the employee decides to do!

Esther Smith is a partner in Thomas Eggar’s Employment Law Unit. For further information, please visit Thomas Eggar.

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Thank you.