How to lose your Restrictive Covenants...

If an employee leaves a business s/he can cause potentially untold damage to their former employer by joining a competitor. To protect again this risk contracts have developed over time to include 'restrictive covenants' which are a set of terms designed to protect the previous employer from unfair competition.

A classic covenant would be along the lines of: 'For six months after the termination of your employment you will not solicit nor deal with customers with whom you worked during the last three months prior to the cessation of your employment with the company.'

However, as the recent case of Brown and Others v Neon Management Services Limited (2018) shows if the employer treats the employees sufficiently badly those employees can resign and claim a release from their restrictive covenants by virtue of their employer's conduct. Such poor conduct in law can amount to a repudiatory (a.k.a. fundamental) breach of contract.

In Brown, this High Court case concerned claimants working in the insurance and underwriting markets. Their employer had fundamentally breached two contracts of employment by seeking to impose a new and more detrimental contract on the employees and by refusing to pay agreed pay rises and bonuses unless and until the new and more onerous contract was signed. The employer also made unwarranted findings of misconduct against the employees and reported them to a regulator unreasonably.

Perhaps unsurprisingly, it followed that the employer's conduct amounted to a repudiatory breach and caused the employees' post-termination restrictions to fall away and be unenforceable.

The lesson here is simple: Significant unfair treatment of staff may lead them to resign, claim Constructive Dismissal and join a competitor free from the covenants designed to protect their original employer.