All other existing terms and conditions will continue to apply…

A recent High Court decision gives employers something to think about when promoting employees.

PAT Systems v Graeme Neilly [2012] dealt with the risks involved in not issuing a new contract to a recently promoted employee. Mr Neilly started with PAT Systems (“PAT”) in 2000 as an Account Manager, which was a junior position. His contract of employment contained a fairly hefty restrictive covenant prohibiting him from competing with PAT for 12 months following the termination of his employment.

Mr Neilly was promoted several times subsequently and ultimately appointed as a Director in 2005. He was given a letter confirming his promotion and making some changes, but advising that the remainder of his original terms and conditions would remain unchanged. Crucially, no specific reference was made to the post-termination restrictions. When Mr Neilly left PAT after several years, he joined a competitor and PAT claimed that this was in breach of the restriction.

The High Court dismissed PAT’s claim. Both parties agreed that the restriction was not enforceable against My Neilly when he first entered into the contract. It was simply not justifiable to impose such stringent restrictions on a junior employee.

However, PAT argued that when he was promoted, Mr Neilly should have been treated as having entered into the restriction afresh and that it was incorporated into the most recent agreement. The High Court rejected this on the basis that the covenant was unenforceable when it was entered into and therefore remained unenforceable. An unenforceable term cannot become enforceable even if it becomes more reasonable at a later date. Therefore, the covenant should be disregarded as if it had never been made.

In light of this, employers should take care when promoting employees and issue new contracts in their entirety to maximise the chances of any post termination restrictions being enforceable.