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In the case of Re-Use Collections Limited v Sendall & May Glass Recycling Limited, the court was asked to consider if valid consideration had been given to support a new restrictive covenant introduced during the course of employment.
The court decided that no consideration had been given and it refused to uphold restrictions, which in any event, it found to be unenforceable for other reasons. However, the court did find that Mr Sendall had acted in breach of his contract of employment and awarded damages to his former employer.
The case highlights the need to ensure that when changes to terms of employment are proposed an employee should be given something real and of value in exchange for the obligations in the new contract, particularly where restrictions are being introduced.
Any valid contract requires the parties to give each other something to support their agreement. This “something” is referred to in legal terms as “consideration”. In commercial contracts, the courts have tended not to assess the value of any such consideration, recognising that the parties are best place to determine for themselves the relative value of the bargain.
This legal doctrine of consideration also applies to contracts of employment and variations to such contracts. But as is often the case the legal principles that apply to commercial contracts are not always applied in a similar fashion to employment contracts.
This case highlighted that there is no conclusive view as to whether the court is required to judge the adequacy of the consideration relied on to support the change to employment terms. However, the court appeared to favour the view that the consideration needed to be adequate particularly when considered in the context of introducing restrictive covenants.
Generally at the start of employment consideration can be easily ascertained. Even after the commencement of employment the court will usually try to assist employees to find consideration to uphold a contractual promise from the employer.
For example, where an employer offers a salary increase to an employee, what does the employee give in return for this improved employment term? The employee does not offer to work harder or to work longer hours in return for the salary increase but the promise to pay can be enforced.
So, the court once held that the consideration given for a wage rise was the employee’s decision not to press for a higher salary.
The difficulties of identifying consideration have led to many academic debates as to whether the doctrine of consideration is dead or alive in the employment law contract. But the general view is that consideration is needed and this case has highlighted some of the key issues employers should have in mind as to what consideration is needed when introducing restrictions by way of variation to existing terms of employment.
What form will the consideration have to take? Does the consideration have to be real and substantial?
In this case the employer failed as it found it impossible to identify and prove that any consideration was given for the introduction of the restrictions.
First, the employer argued that the employee had received certain contractual benefits in return for the restrictions but it became clear that the employee already had the benefits and therefore he had received nothing new to support the agreement.
Second, it was argued that the employee had received a salary increase contemporaneously but again no real link could be proved. Finally, the employer unsuccessfully ran the argument that the employee’s continued employment itself was a benefit: ie refraining from terminating the contract was adequate consideration to support the new obligation.
But, as the employee was never told that if he did not accept the new contract his employment would end, the court did not accept that this amounted to adequate consideration to support the new terms.
In the absence of any consideration supporting the contractual variation the restrictions were not valid.
The case highlights the need to ensure that when changes are proposed an employee should be given something real and of value in exchange for the obligations in the new contract, particularly where the restrictions are being introduced.
An increase in salary would be sufficient consideration, but if this is used to support the introduction of new terms it needs to be spelt out.
For example, merely linking the changes to an annual salary increase may give rise to confusion and it may not be clear to the employee what portion of the increase reflects their past performance or what portion is new money and is the consideration for the variation.
Again, a promotion with accompanying improved terms will be supportive of a finding of valid consideration, but the improved terms must be real improvements.
The court will be cautious in accepting an employer’s arguments when the court is being asked to exercise elements of its equitable discretion and this can lead the court to making a subjective judgement as to the adequacy of the consideration relied on.
There is a natural caution of allowing an employer to use its stronger bargaining position to force changes against the employee's interests.
The courts readily recognise that when an employee is in employment the employee may have little choice but to accept the new terms, even if they do fetter their future freedom on leaving employment.
The clear message is, if such restrictions are to be introduced, the employer should follow the following principles:
The desire to adopt provisions to maintain a stable workforce in the interest of all employees may not be enough, particularly as the court will be sceptical of whether the employer is putting pressure on the employee.
This article was written by Alan Julyan.
For more information please contact Alan on +44 (0)20 7427 6407 or email@example.com