Restrictive covenants are a common feature of many employment contracts. They are favoured by employers which want to ensure that departing employees will not solicit business, compete, poach clients or colleagues, and so on. When they are needed they are really needed and so this is an important question.
It is always good practice to review and update contracts and their restrictive covenants every once in a while, especially on a promotion or other material change of role which might affect the relevance or adequacy of the existing covenants. But what happens when the formalities are overlooked, and you discover when the employee leaves your company that his latest contract wasn’t signed? Are the restrictive covenants in it still enforceable?
The first thing to note is that the burden is firmly on the employer to show that the restrictive covenants were agreed with the employee. It will not be able to imply in such a term through necessity or custom and practice. Where there is no signature on the dotted line to that effect (whether by email or wet-ink signature is irrelevant), the main way for the employer to prove acceptance of the contract terms by the former employee is by demonstrating implicit acceptance instead. He is almost bound to argue that there is no signature because he didn’t agree to some or all of the contract containing the covenants, and so you cannot enforce it against him. The question for you will be how that argument might be rebutted and in particular how contractual acceptance might be inferred from the circumstances surrounding the introduction of that contract. Relevant considerations could include:-
- Did the employee make any express objection to the covenants as opposed to any other part of the contract? If there was a clear sticking point in relation to sick pay or holiday entitlement, for example, but ultimately the employee started work without resolution of those questions, he may still be able to challenge those terms. However, he will find it more difficult to say that he is not bound by the covenants because (a) by starting work he effectively confirmed the existence of a contract (in the legal rather than paper sense) between him and the employer; and (b) he had not indicated at the time that contract was entered into that covenants did not form part of it.
- Where the unsigned contract containing the covenants you want to enforce is not the employee’s first, has he used or benefitted from any term in the new contract which was not in the one before? Your employee cannot cherry-pick his acceptance of the new terms unless you let him do so. Or rather, he can try to do so but the alert employer will then have to decide whether to take that attempt as an overall rejection of the new terms. If so, it then has the option either to reverse the conditions on which the new contract was issued (so no pay increase, no more favourable benefits, no promotion/bonus, etc.), or to decide that the cherry-picking goes to the root of the relationship between it and the employee and so consider the termination of his employment. Especially where the employer’s case for requiring post-termination restrictions is clear, dismissal for a refusal to accept them is likely to be fair, and it does not matter to that whether as a question of law the covenants sought to be imposed would actually have been enforceable. However, if the employer is aware of the employee’s objection to the new covenants and does nothing to bring the issue to a head one way or the other, then it could be deemed to have accepted that the contract does not include them.
- How long has the employee worked under the unsigned contract containing the covenants? Some terms can be deemed accepted much more quickly than others, since some are of more direct and immediate impact on the employee. In those cases, the likelihood of the employee acting in some manner unequivocally consistent with acceptance is much greater. A new term around the provision of a car allowance rather than a car, or a shift in remuneration from base salary to commission, for example, will therefore be deemed accepted almost as soon as they first affect the employee and he does not complain. The problem with covenants is that by definition they scarcely affect the employee at all until he leaves and so it is much harder for the employer to argue that he has done something, anything, before then which is inconsistent with his not having agreed to them.
- In particular, why was the contract unsigned? Was it perhaps just inertia or forgetfulness by the employee and a failure in the employer’s follow-up processes, and so not the product of any deliberate objection on his part at all? Was there some misunderstanding as to how far the written contract was for information only bearing in mind an acceptance through other means (nothing in the law requires the acceptance of an employment contract to be in writing – the employer’s issue is then just one of evidencing it). Are there promises to sign and return the contract (i.e. evidence of acceptance of it) which then just didn’t happen?
So the short point is this – far better to have a written acceptance of all your contract terms, but restrictive covenants in particular because by their nature, acceptance of them is far harder to imply than for terms of more immediate application. That means (ideally) not allowing people to start or not actioning promotions/pay reviews/benefit improvements until you have them agreed in black and white. Not a route to immediate popularity for HR, maybe, but your management will be grateful one day.