Introductory guidance to the ‘contract of service’, the written statement of particulars, and varying the contractual terms
Here we list a selection of key cases, reported since 2010, on disputed or breached terms and conditions , providing a summary of the decision and implications for employers.
Cases have been grouped together based on the specific contractual issues being dealt with:
- Express and implied terms
- Unauthorised deductions
- Variation of contract
- Pay in lieu of notice - PILON
- Restrictive covenants
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Express and implied terms
Hershaw v Sheffield City Council | Employment Appeal Tribunal | 4 Nov 2014
(unreported, UKEAT/0033/14 27 June 2014, EAT)
Issue: Consultant liability
Twelve council staff members raised a formal grievance about their employer's inaction over an issue concerning their pay levels. The Council used an external HR consultant to investigate the grievance. The consultant was authorised to write to the employees with the outcome of their grievance, but not to determine their pay. The consultant mistakenly told them that they had been placed on a higher salary grade.
The Employment Appeal Tribunal held that although the consultant didn't have actual authority to increase the grade, the letter had contractual effect. The Council had authorised the consultant to answer the employees' grievance and so the letter bound it to pay the higher salaries, just as if it had written directly to the employees itself.
Implications for employers
- Employers who engage external HR consultants should be careful about the extent of the remit given to the consultant.
- If an external HR consultant is engaged, that person will act as agent for the employer (also called the principal).
- An agent who makes a contract on an employer’s behalf binds the employer to the contract if it is within the scope of the agent's authority.
- If an employer leads employees to believe that it has appointed the agent to act on its behalf. the employer will generally be stopped from the denying the agent has authority. The agent is said to have apparent or ostensible authority.
- Any promises or commitments, whether orally or in writing, given by an external consultant which an employee then relies upon by continuing to work could bind the employer and should only be made where the employer has given its express consent.
- In some cases if an external HR consultant exceeds their instructions an employer may be able to recover compensation from the HR consultant for any losses which arise.
Park Cakes Ltd v Shumba and others | Court of Appeal | 31 Jul 2013
(unreported,  EWCA Civ 974 31 July 2013, CA)
Issue: Implied terms through custom and practice
Employees who were employed by Northern Foods then transferred under Tupe to Park Cakes Ltd. Four of the employees who were then made redundant claimed that they were entitled to enhanced redundancy payments, as these had been made without exception at Northern Foods before the Tupe transfer. The key question was whether the enhanced payments had been made consistently over a substantial period. The evidence was that the enhanced terms had been paid in all seven redundancy exercises from 1993 to 2006. Therefore the Court of Appeal (CA) held that the tribunal had made an error by not inferring that the enhanced terms had been paid without exception. Therefore the case had to be reheard by a different tribunal. The CA gave some useful guidance about when a term has become implied. The important question is not whether the employer intended to be bound by the term, but whether the employer’s conduct, viewed objectively, conveyed to the employee that the employer intended to be bound.
Implications for employers
- Employers should review any enhanced redundancy packages or practices to ensure that they don’t face any claims for enhanced payment in subsequent redundancy exercises.
- Employees will often try to argue that an implied term for an enhanced payment has arisen through custom and practice.
- In order for a term to become implied by custom and practice it must be well established over a period of time, be known to employees and be clear and unambiguous.
- The relevant factors to take into account in implying terms, include whether the terms were well known by all concerned.
- The more often enhanced redundancy payments have been paid to employees, the more likely it is that a contractual obligation has arisen.
- If an employer clearly and consistently describes enhanced redundancy terms as being ex-gratia or discretionary, then it is less likely that employees could reasonably understand them to be contractual.
- Discretionary benefits do not have to appear in a staff handbook. If a discretionary policy is set out in a staff handbook it should be clearly stated as being non-contractual.
- If the employer has made enhanced redundancy payments over a long period of time it is more likely that a contractual obligation has arisen.
- If an employer has publicised the availability of enhanced redundancy benefits to the whole workforce, to a trade union, or to a large group of employees then the more likely it is that it has conducted itself so as to create an obligation. So communications to the wider workforce need to be very tightly controlled to avoid misunderstandings by employees about their entitlements which they could later seek to rely upon.
- If an employer makes enhanced redundancy payments, but varies the amounts or the terms of payment a legal obligation may not have arisen. However if there is a similar pattern of benefits an obligation may arise.
- An employer may create an obligation to pay a minimum level of redundancy payment even though there have been some discretionary variations to the redundancy payments.
Dresdner Kleinwort Ltd and another v Attrill and others | Court of Appeal | 26 Apr 2013
(unreported,  EWCA Civ 394 26 April 2013, CA)
Issue: Discretionary bonuses
The employees were bankers working in the investment banking arm of Dresdner Kleinwort Limited which merged with Commerzbank in 2009. In 2008 many key employees left and to keep the remaining employees, the Chief Executive announced to staff at a meeting that the bank was introducing a minimum bonus pool for 2008 of €400m.
Letters were sent to employees later that year providing details of their provisional bonus awards for 2008. A ‘material adverse change’ clause was also inserted in the letters entitling the bank to review the bonus awards if ‘additional material deviations’ were identified in the bank’s accounts. Then in 2009 the employees were told that their 2008 bonuses would be only 10 percent of the amount originally announced.
By the time the matter reached the Court of Appeal the key issues were whether:
- the oral announcement of a guaranteed minimum bonus pool of €400m gave rise to a binding contractual commitment to pay bonuses to the claimants,
- the later introduction of the MAC clause in the 2008 bonus letters constituted a breach of the implied term of mutual trust and confidence and
- the MAC clause was properly applied by the bank when it decided what bonuses should be paid to the claimants.
The Court of Appeal (CA) agreed with the High Court and decided that the employees’ contractual claims for the bonuses worth a total of between €40m and €50m should succeed, as the Chief Executive's verbal announcement of the minimum bonus pool was contractual. The subsequent letter seeking to limit it could not unilaterally vary the previous verbal term of the contract and was a breach of the implied term of mutual trust and confidence. Even the public scrutiny of bonuses could not get around the contractual commitment that the bank had made to its employees.
Implications for employers
- Employment contracts are often made of a mixture of written and verbal terms, with some terms being implied by legislation or previous case law as well.
- A verbal announcement can, in some circumstances, amount to a binding contractual term.
- Great care should be taken in any oral or written communications to employees about bonuses, especially regarding any conditions attached to a bonus.
- Employers should review any express powers attempting to make unilateral changes to terms and conditions of employment contained in employees' contracts or handbooks.
- Some such clauses may enable unilateral changes but variation will only be effective without consent in limited circumstances.
- Handbooks may state that HR must be involved in unilateral changes to terms and conditions because there is a risk that individual managers might make promises to employees without proper authority.
- However, where a change is effected by communication to a group of employees in public there is not the same risk and the change may be binding.
- If an employer would like a particular process to apply to all changes, the person who is authorised to make changes should be expressly stated in contracts and handbooks.
- The CA's guidance on what constitutes 'display' on the intranet is interesting for employers generally, as display on the intranet for the purpose of making variations to employment contracts included the one-off broadcast of the bonus announcement.
Smith v Trafford Housing Trust | High Court | 16 Nov 2012
(unreported,  EWHC 3221 (Ch) 16 November 2012, HC)
Issue: Breach of contract - demotion following Facebook post
A Christian manager with 19 years service at Trafford Housing Trust was demoted for making allegedly homophobic comments on Facebook. He had posted a link to a BBC news item about gay marriage adding the comment “an equality too far” underneath. Two work colleagues posted responses disagreeing with him and he posted a second comment purporting to explain and justify his first comment.
His employers were notified. They disciplined him and eventually decided he had committed gross misconduct and breached the employer’s Code of Conduct and Equal Opportunities Policy. He was demoted with a pay reduction which would have been significant over time. He claimed for breach of contract. The case did not involve a claim for discrimination on the grounds of religion or belief but only concerned contractual matters. The key issue was whether the Facebook postings were gross misconduct.
The High Court found in favour of the employee, essentially because the employer had committed a serious and repudiatory breach of contract. The comments posted by the claimant needed to be looked at in context and a reasonable Facebook user would not attribute the comments made to being to the employer as the comments were not work-related and were made outside of normal working hours. Mr Smith was paid damages representing the difference between the salary paid and his contractual salary, although this was limited to financial loss during the notice period and was less than £100. Of course, if he had claimed discrimination, chosen to resign and claim unfair dismissal, rather than work on under protest and opt for wrongful dismissal, he would have recovered more substantial compensation.
Implications for employers
- Employers should have clear and comprehensive social media and disciplinary policies to cover genuinely offensive Facebook comments made by an employee who is identifiable as working for them.
- Some comments made out of work by employees may amount to gross misconduct and some will not.
- Employers cannot automatically decide that personal comments which others find offensive have brought the employer into disrepute. Comments must always be looked at in context and whether they have had a detrimental effect on the employer, customers or other employees.
- In its judgment, the court made some important points about Facebook. Employers should consider if a reasonable reader of an employee’s Facebook page would rationally conclude that postings were made on the employer’s behalf.
- Employers should not endorse any potentially discriminatory views made by employees via social media.
- However employers should assess comments objectively. Any disciplinary action at the end of a disciplinary process by employers should be reasonable and proportionate. In milder cases, a warning may be appropriate.
- Employees have a right to express personal views in a private capacity. However, comments which are discriminatory may be actionable, particularly when their employment is clearly listed on their profile.
- If views are expressed on sport, food and cars, as in this case, they are clearly not for work purposes. A balance has to be struck between discriminatory comments and free speech.
- Employers should act upon extreme or offensive comments which could form the basis of an harassment claim both against the employer and against the employee personally.
- A moderate expression of opinion made on a personal Facebook page will not entitle the employer to breach an employee’s contract.
- In other cases (for example in Preece v. JD Wetherspoons plc ET/2104806/10) employees who have posted critical remarks on Facebook have been validly dismissed for gross misconduct.
Edwards v Chesterfield Royal Hospital NHS Foundation Trust | Supreme Court | 14 Dec 2011
(unreported,  UKSC 58 14 December 2011, SC)
Issue: Breach of an express term - damages
A consultant surgeon claimed £4 million damages for loss of career. He was dismissed in 2006 for gross personal and professional conduct and had not been able to obtain another permanent post since. He claimed that his employer had failed to follow a contractual disciplinary procedure and that if the correct procedure had been followed, he would not have been dismissed. He was therefore he alleged entitled to damages representing the whole loss of his career. His main assertion was that he would not have been dismissed if the disciplinary panel had correctly included a clinician of the same discipline.
A youth community worker had also been dismissed for gross misconduct. He similarly brought a breach of employment contract claim for failure to follow the provisions of a contractual disciplinary code. He said this had caused him a loss of reputation and inability to work in his chosen field.
The key issue was whether employees can claim damages for breach of an express term in their employment contract where the breach relates to the manner of dismissal, rather than anything said or done before the dismissal. Previous cases had said such employees should bring tribunal claims for unfair dismissal, to which the statutory cap on compensation would apply rather than bigger contractual claims - see Johnson v Unisys Ltd  IRLR 279.
The Supreme Court judges all gave slightly different decisions. However, the majority said that employees cannot claim damages for breach of an express term in their employment contract where this relates to the manner of dismissal. The statutory unfair dismissal scheme deliberately limits the right to claim including time limits, qualifying service requirements and a compensation cap.
Contractual damages can only be claimed if the loss precedes and is independent of the dismissal process. In other words there has to be something else the employer has done wrong rather than just messing up the disciplinary process.
In the surgeon’s case, his dismissal followed the improperly constituted disciplinary panel's findings, not anything said or done before the dismissal.
In the youth worker’s case the loss of reputation was caused by the dismissal itself.
Therefore the employees were not entitled to pursue damages for the breach of contract, without limitation.
Implications for employers
- Employers may wish to avoid terms and conditions of employment which include a contractual disciplinary procedure and just have a pure policy instead.
- If a contractual procedure is required, as is often the case in the public sector, the policy must be adhered to by the employer, to the letter.
- The Johnson case is still good law and it prevents contractual claims for the manner of dismissal.
- It does not matter if a contract claim is based on breach of an implied term or an express contractual term. If the employee’s main complaint is the manner of the dismissal then they should bring an unfair dismissal claim rather than a bigger contractual claim.
- Employers who have detailed contractual disciplinary procedures should not face huge claims arising only from breach of the procedure.
- Obviously it is still safer to follow disciplinary procedures to the letter rather than becoming embroiled in cases such as these.
- If an employee claims loss caused by a suspension, or psychiatric injury caused by treatment before the dismissal, then that can still be claimed on a contractual basis.
- For employers with contractual disciplinary processes it may be advisable to move through the process efficiently and make very clear that there is a link between whatever the employee had done to warrant the process being started and the eventual dismissal.
- Employers may still face claims for an injunction to try and limit damage to an employee’s professional reputation if the employee perceives flaws in the disciplinary process which may affect their future employment prospects.
- If employers start a disciplinary process in breach of express contractual terms, injunctions may be available even if contractual damages are not.
- Employers who cause unfair dismissals by not following a contractual disciplinary and dismissal procedure should not face damages claims for vast future losses just based upon that breach.
- Contractual compensation is not capped and employees will still seek contractual claims especially to circumvent the statutory unfair dismissal maximum limits, or if they do not meet the one year (two years from 6 April 2012) qualifying requirement.
Esparon v Slavikovska | Employment Appeal Tribunal | 8 May 2014
(unreported, UKEAT/0217/12 8 May 2014, EAT)
Issue: Unauthorised deduction of wages - employee should have been paid national minimum wage
A senior care assistant in a residential care home worked with residents with learning difficulties. She lived at the care home and worked during the day and a sleepover shift from 9pm until 7am the following morning (which earned her an extra £25).
The employer said the care assistant was able to sleep on site and only carried out duties in emergencies, but she contended that she did a variety of duties during the sleepover shifts and that she was not allowed to sleep.
The key issue was whether she was entitled to receive the national minimum wage (NMW) for all her night shift hours and if paying less than the NMW amounted to an unlawful deduction from wages.
The Employment Appeal Tribunal held that as a matter of fact the care assistant could be required to undertake various duties during the sleepover shift and eventually concluded that she was entitled to receive the NMW for all her night shift hours (even if she was asleep and not working) and that there had been an unlawful deduction from wages. The employer had a legal obligation to have a qualified person on site at all times which is why they needed her there. Her mere presence was therefore enough to constitute working time for NMW purposes. The employer was ordered to pay the employee approximately £15,000.
Implications for employers
- Employers, especially those in the care sector, who have a statutory requirement to have qualified persons present during sleepover shifts should pay such employees the NMW.
- Employers in this position may be exposed to tribunal claims for unlawful deduction of wages.
- This type of claim can be backdated for a lengthy period so employers may face substantial reimbursements of underpayments.
- There are financial penalties for employers who fail to pay NMW.
- If there is no regulatory or statutory requirement for an employee to be on the premises overnight, then the employers may argue that sleepover shift is not working time for NMW purposes.
Variation of contract
Department of Transport v Sparks | Court of Appeal | 14 Apr 2016
(unreported,  EWCA Civ 360 14 April 2016, CA)
Issue: Breach of contract - unauthorised change to attendance management policy
Seven employees were each employed by a different agency within the Department for Transport. Each agency had a staff handbook, based on the same standard format divided into ‘Part A’, which was expressly stated as incorporated into employees’ employment contracts and ‘Part B’, which contained various policies expressed to be guidance relevant to the employment relationship and operation of contractual terms and conditions.
Following unsuccessful negotiations with the trade unions, the Department unilaterally imposed a new standardised attendance management policy. This introduced a new trigger point for formal absence management to kick in of five days absence rather than the previous 21 days. The employees sought a declaration from the court on the terms of their contracts.
The Court of Appeal found in favour of the employees and gave a declaration that their employer had breached the contracts of employment by imposing the change to the attendance management provisions of the staff handbook. The provisions of the handbook relating to absence management were sufficiently clear and precise to be incorporated into the contracts. As no agreement about changes was reached, unilateral changes could only be made if they were not detrimental to the employee.
Implications for employers
- Provisions in staff handbooks may be incorporated into contracts of employment.
- Staff handbooks should be expressly non-contractual if employers wish to be able to revise and amend policies and procedures in the handbook.
- Changes to non-contractual policies and procedures do not require agreement of all parties but, as a matter of good practice, employers should inform employees of any changes.
- Any changes to contractual terms must be agreed with employees or their representatives.
- Some amendments completely beneficial to employees may be permitted amendments.
- Amendments which trigger early absence management are likely to be detrimental.
- Some terms in this case were held not to be incorporated, for example the clauses requiring notification of sickness absence by 10am and self-certification or supply medical certificates within set time limits.
- The easiest practice is to clearly describe staff handbooks as non-contractual as they can then be varied more easily.
Abercrombie v AGA Rangemaster Ltd | Court of Appeal | 11 Oct 2014
(unreported,  EWCA Civ 1148 11 October 2013, CA)
Issue: Short time working
Employees brought proceedings in the employment tribunal for unlawful deductions from their wages. Their employer was considering making redundancies due to the economic climate. It concluded a collective agreement with the GMB union to reduce employees' working hours by five hours per week to 34 hours, with no working on Fridays, with a pay reduction over a six month period. GMB asked the employer to confirm that guarantee payments would be paid to the employees when they were working reduced hours.
The employer did not agree that guarantee payments would be made because the reduction in working hours was a result of an agreed collective variation to the employees' terms and conditions. The claim therefore included non-payment of guarantee payments. The employees argued that temporary variations to a contract were not a change to 'normal' working hours, as a temporary contractual variation (as occurred in this case) was not a change to 'normal working hours' and the law expressly provided for entitlements to guarantee payments ‘in any case where an employee's contract has been varied or where a new contract has been enteredinto, in connection with a period of short-term working.'
The Employment Appeal Tribunal (EAT) rejected that argument and held the tribunal was right to conclude that there was an effective variation in the contracts of employment. This meant that there were no days when any of the employees were not provided with work when they would normally be required to work in accordance with their contracts. The EAT therefore held that employees were not entitled to guarantee payments under Section 28 of the Employment Rights Act 1996.
Implications for employers
- Employees can be laid off without pay if a specific term in the employment contract allows the employer to do so.
- When employees are laid off, they may be entitled to a statutory guarantee payment from the employer. Payment is limited to a maximum of five days in a three month period.
- There is a statutory controlled upper limit on the daily amount which is reviewed annually.
- If employers negotiate to reach an agreement to vary working patterns to avoid redundancies, there may be no entitlement to guarantee payments.
- If an agreed variation becomes the new contract then there will then be no days when employees’ are not provided with work under their contracts’ as the contract has changed.
- If an employer imposes a contractual right to lay off employees then guarantee payments may arise.
Pay in lieu of notice - PILON
Societe Generale v Raphael Geys | Supreme Court | 19 Dec 2012
 UKSC 63
Issue: Pay in lieu of notice
In a curiously handled dismissal, the managing director at the bank Société Générale was handed a letter in November that stated his employment was terminated with immediate effect. He was then escorted from the building. The Bank did not tell him the date on which his termination would take effect, nor that it was made under the contractual payment in lieu of notice clause.
About two weeks later he received about £32,000 in his bank account which he assumed was a payment in lieu of notice. The bank still did not communicate what the payment was for. Under his employment contract, Mr Geys had a three months' notice on termination of his employment, with no pay in lieu clause, although the employer’s right to pay in lieu of notice was set out in its staff handbook.
Mr Gey’s solicitors then wrote to the bank's solicitors in January stating that he affirmed his contract of employment and reserved his position in relation to the acceptance of the monies until it was understood what they were for. The bank’s solicitors then replied confirming that it had terminated his employment with immediate effect back in the November and that his pay in lieu of notice had been credited to his bank account.
A dispute arose as to when the employment contract actually terminated. The date was important as his termination payment was just under €8m if his employment was terminated in 2007, or €12.5m if he was terminated in 2008. The bank's case was that the contract terminated in November or in December when the bank made the payment in lieu of notice.
The High Court decided that the bank's actions in November amounted to a repudiatory breach of contract. As the bank had failed to expressly inform the employee that it was summarily terminating his employment pursuant to the pay in lieu of notice clause, his employment contract did not terminate until 6 January, the day on which he was deemed to have got the solicitor’s subsequent letter confirming the summary dismissal and pay in lieu of notice. He was therefore entitled to more money than would otherwise have been the case. The High Court held that there was no conflict between the handbook and the contract. The right to three months' notice was subject to the right to pay in lieu in the staff handbook.
Implications for employers
- Employers, HR departments and external lawyers should co-ordinate their responses when decisions to terminate employment are made.
- Employment contracts and staff handbooks should be cohesive. If they contradict each other expensive legal disputes may arise.
- If an employer terminates an employee's employment by making a summary dismissal using a contractual pay in lieu of notice clause (PILON), the employers must specifically communicate this to the employee at the time of the dismissal.
- Employers should write a termination letter to the employee stating that the employer has a right to make a PILON, that the employer is exercising that right, and that the contract of employment will be terminated on a certain date.
- A failure to provide proper notice may mean that the termination of the employee's contract is not effective.
- Employers who do not have the express power to terminate the employment summarily in this way are in a dangerous position.
- A non contractual summary termination will take effect only if it is clearly 'accepted' by the employee. An employee may argue that the contract remains in existence as it has not been lawfully terminated as the employer had no good cause.
- Employers may be better off exercising a contractual PILON clause to avoid a dispute in the tribunal to decide if the employee remained employed.
- Acceptance of the termination by an employee may be express or implied, for example if an employee does not work or starts work with a competitor.
- Employers should take legal advice on the pros and cons of having contractual PILON clauses. If the employer wishes to get rid of an employee immediately then a clear PILON is needed.
- However, payments pursuant to a PILON will have tax implications affecting the terms of a settlement agreement.
- Employers should check if the summary dismissal provisions for gross misconduct are tailored to the particular employment and are unambiguous. Employers may wish to ensure they have a right to terminate in advance of the two year qualifying period for bringing unfair dismissal claims (previously one year which still applies for many employees).
- If an employer gives notice incorrectly the employee will often have a choice to accept the repudiation or to treat the contract as still in force for a longer period.
Cavenagh v William Evans Ltd | Court of Appeal | 24 May 2012
(unreported,  EWCA Civ 697 24 May 2012, CA)
Issue: Pay in lieu of notice
The managing director of a company was dismissed, albeit dressed up as a redundancy. The company agreed to pay him six months pay in lieu of notice, in accordance with his contract. Shortly afterwards the company discovered that he had arranged the transfer of £10,000 of the company’s money into his pension fund. On discovering this the company refused to pay the former director his payment in lieu of notice and he brought a claim for breach of contract.
The relevant clause in the service agreement was as follows:
‘The Company may terminate the Appointment forthwith by paying salary and the value of all other contractual benefits in lieu of the required period of notice...and it is expressly agreed and declared that such payment in lieu of notice shall not constitute a repudiation of this Agreement.’
The case eventually reached the Court of Appeal which decided that the former managing director should be paid the pay in lieu of notice. When the employer dismissed him it did not know about his wrongdoing and agreed to make a payment in lieu of notice. A debt accrued at that point.
(The employer could not rely on the principle established in Boston Deep Sea Fishing v Ansell. This principle enables an employer who has dismissed without notice in circumstances when it was not entitled to do so, to possibly justify their actions if it subsequently discovered that the employee has committed an act of gross misconduct which would have entitled the employer to dismiss without notice in any event. However this principle does not apply where the employer had chosen to lawfully terminate the employment under a payment in lieu of notice clause).
Implications for employers
- This case may put employers off putting payment in lieu of notice clauses. At the very least employers should check the wording of the clauses they use.
- If an employer terminates employment with a payment in lieu of notice it cannot later avoid paying if it subsequently discovers that the employee has committed a serious breach of contract that would have entitled it to dismiss the employee without notice if it had known about this at the time.
- An employer cannot therefore defend a claim for a debt owed to an employee by arguing that it discovered that they committed gross misconduct after agreeing to make the payment.
- This case only applies to payments of a debt (such as an agreed payment in lieu of notice) and does not extend to damages for breaches of contract. It remains a clear principle that wrongful dismissal claims can be defeated if there is evidence of misconduct discovered after the dismissal.
- Employment contracts, especially payment in lieu of notice clauses, should include provisions that enable the employer to recover payments in lieu if an earlier breach of contract emerges.
- Making such payments in a compromise or settlement agreement would also enable employers to provide for reimbursement of the payment.
Threlfall v ECD Insight Ltd and another | High Court | 17 Dec 2012
 EWHC 3543 (QB)
Issues: non-compete clauses
The claimant was a journalist and business news broadcaster who entered into a service agreement with a media business to become their Head of Media. He was to provide media skills coaching and bring in new business. His package included basic salary plus an equity share of 8% in the business, provided he stayed with the company for two and a half years. There was some understanding about increasing the size of this share from 8% to 20% in November 2005.
The contract contained:
- a forfeiture provision in relation to the shares which would be triggered if he left to join a competitor
- restrictive covenants extending for six months after termination and
- a non solicitation clause where he agreed for a period of six months following termination of the Employment not to directly or indirectly '... solicit, canvas or endeavour to obtain business relating to management and communications development which is in direct competition with the Company's activity...'
Before joining the company he accepted invitations to moderate high-profile conferences in front of large high-level audiences and he accepted two further invitations to moderate such events during his employment on the company's behalf. It was not work the company had undertaken previously.
Mr Threlfall eventually handed in his notice to leave the company to work for Reuters, presenting its television service. He claimed breach of contract including entitlement to his equity share increasing to 20% from November 2005, a termination payment, a bonus payment and dividends. The company counterclaimed for breach of contract, including breach of his restrictive covenants and his fiduciary duty, as well as the duty of good faith and alleged that his actions had triggered the forfeiture of the shares.
It was held that:
- Mr Threlfall was entitled to the 20% equity share and the forfeiture provisions were not triggered.
- The counterclaim for breach of restrictive covenants was dismissed as ‘event moderation’ and fell outside the scope of the restrictions; in any event once Mr Threlfall left it stopped being a company activity.
- The company’s claim that he had breached his duty of good faith was successful but this did not extend to a fiduciary duty as he was not a director and therefore did not owe a fiduciary duty to the company.
Implications for employers
- Restrictive covenants must be carefully drafted to protect the employer in every respect.
- The more tailored and specific they are, the more likely they are to be enforceable.
- Careful wording should extend not only to restrictive covenants but to garden leave and notice clauses.
- Contractual restrictions should be reviewed as the employment progresses to ensure they reflect the current position, although the employee's consent will be required to modify them.
- Employers may use equity shares to attract high profile employees whose market basic salary the company may not be able to afford. If so, bad leaver provisions and careful restrictive covenants will be crucial.
- Employers may prefer to offer a specific number of shares rather than a percentage equity interest otherwise a dispute may arise as to the extent of the equity. Employers may wish to protect the ex-employee benefiting from increased later values which are not directly related to the employee's performance.
- Employee-shareholder provisions are likely to increase with the Government’s new employee owner legislation (if this is used by employers). Employers must get their lawyers to draft careful, appropriate ‘good leaver/bad leaver’ provisions in employment contracts and shareholder agreements as these notoriously give rise to complex disputes about what has been agreed.
- Smaller employers with employee equity provisions may need ‘bad leaver’ provisions which cover resignations and a wide range of other employee departure situations.
- Restrictive covenants dealing with overall non-competition are traditionally harder to enforce than non-solicitation and non-dealing covenants.
Please note: While every care has been taken in compiling these notes, CIPD cannot be held responsible for any errors or omissions. These notes are not intended to be a substitute for specific legal advice.
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