A situation might arise when an employee leaves your organisation and starts engaging in competitive activities in breach of the restraint clauses in their employment contract. You search for a signed copy of the employment contract but cannot find it. Or you can only find an unsigned version and the employee claims they never signed it. What are your options?
Can you enforce post-contractual restraints if you cannot produce a signed document?
In Agha v Devine Real Estate Concord Pty Ltd (2021), a real estate firm sought to enforce post-employment obligations upon two of its former employees. The post-employment obligations included a restraint on disclosing confidential information, solicitation of clients and staff, and working for competitors. One employee was originally employed as a receptionist and was later promoted to sales assistant for the other employee. The other employee was party to an employment and shareholder agreement, which included restraints.
The employer was unable to produce the sale assistant’s employment agreement. It argued unsuccessfully that he would have signed an employment agreement containing the restraint, given other management employees at the time signed similar agreements containing restraints. The Court determined there was no evidence supporting the existence of an employment agreement containing restraints binding the employee.
Can acceptance of a contract – and the restraints within it – be inferred by conduct?
If an employment contract is delivered to an employee and the employee continues working in accordance with its terms without objection, there is an argument that the employee’s acceptance is inferred by their conduct. This argument is made more difficult if the contract prescribes a method to signify acceptance, e.g. sign and return a copy of the contract. However, even in that situation, it is not impossible to argue that the acceptance is given by the employee by accepting the salary and other benefits provided in the contract.
A variation to an employment contract to insert new or more onerous restraints requires that you provide some benefit or consideration in return for the employee’s agreement to the variation.
In Tenon FM Ltd v Cawley (2018), an employee of a UK business commenced her employment in 2008 and worked her way up through the business. When she resigned in May 2018, she held the role of Operations Director and was a member of the senior leadership team reporting directly to the CEO.
The employee’s initial employment contract contained a number of restraints. In 2011, she was asked to sign a contract containing more onerous restraints. When the employee resigned and the employer sought an injunction to enforce the restraints in the 2011 contract, the employer could not produce a signed copy of the contract. The employee said she had refused to sign it because she did not agree with the post-termination restrictions they contained.
The Court observed that, while a contract’s terms could be accepted by conduct, this would only apply in circumstances where the change had an immediate effect on the employee. Here the changes to the contract only took effect after the termination of employment.
The Court ruled that an employee continuing to work and the employer continuing to employ the employee could not amount to consideration for a consensual variation, where the change introduces more severe terms in restraint of trade.
The Court also observed that at least two other members of the senior leadership team and two other senior employees who had access to clients and the same allegedly confidential information as the employee did not have any restrictions in their contracts. This called into question the reasonableness of the covenants and whether the employer had a legitimate business interest to protect.
How can you ensure your restraints are legally enforceable?
Refer to the chapter Restraints of trade in your Employment Law Practical Handbook for guidance in drafting a legally enforceable restraint and to learn when courts are likely to reject a restraint of trade clause.
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