Restrictive covenants and consideration

Re-use Collections v Sendall & May Glass Recycling

Changing employees’ terms and conditions presents a number of pitfalls for employers.

Rather than impose new arrangements, there’s a bargain to be struck; if the terms are to be less favourable to the employee, for example, then this usually calls for some sort of benefit or other sweetener (known as consideration). It’s an important point of contract law.

In the Re-use Collections case a question arose over the status of restrictive covenants. Specifically, could the employer rely on covenants which it had introduced to the employee’s contract, but for which it hadn’t offered any new consideration.

Mr Sendall worked for a family recycling business for many years without having a written contract. When Re-use took the company over, it issued a contract containing non-solicitation, non-dealing and non-compete clauses which Mr Sendall signed.

Not long after, he left to work for a competitor. Re-use wanted to enforce the covenants but the High Court held that it couldn’t. Mr Sendall had not had “some real monetary or other benefit” for the contract variation, the Court said (and the covenants were unreasonably long in duration, in any event).

Re-use had argued that his benefits package, which included a pay rise, amounted to consideration, but the Court disagreed. The new contract confirmed mainly existing benefits and there was nothing to say that the pay rise was unique to Mr Sendall – or that it was linked to the new terms to which he was agreeing. It was significant that the employer had not made it clear that the pay rise, or his continued employment, for example, was conditional on Mr Sendall accepting the new employment terms.

So Mr Sendall had not received a separate benefit linked to the change in his contractual terms. Bear this in mind when looking to amend terms and conditions. Make sure you give some sort of valuable consideration (a signing bonus, or perhaps extra holiday) and make clear that the employee is getting that benefit as a condition of accepting the new terms.

And, as always, take care and advice when wording restrictive covenants.