Restrictive Terms in Employment Contracts - Case Study Example

Restrictive Terms in Employment Contracts Number Department Question a) Stella Diamond v Angela Stella Diamond’s restriction of the use of the recipe is likely to be given effect due to its narrowness in focus and the existence of implied post-termination terms in Angela’s employment contract. In Capgemini India Private Ltd v Krishnan (2014 EWHC 1092 QBD), the English High Court recently decided that the activities of former staffs were subject a contract they had signed, as a result of expiry of their employment contract. Like Angela, the employees sought to disregard restrictive terms they had signed with their employer (Meermann, 2014; Van & Hazans, 2008). The duration of effect is equally valid, considering that in Romero Insurance Brokers Ltd v Templeton [2013] EWHC 1198 (QB), the High Court validated a 12-month duration for enforcing a restrictive terms in the employment agreement (Meiners, Ringleb, & Edwards, 2011). However, unlike in Monster Vision UK Ltd v McKie [2011] EWHC 3772 (QB) where restrictive clauses seeking to disbar Mr McKie from virtually any business transaction were disallowed by court, restricting Angela’s use of the unique recipe is reasonably essential in the circumstances to safeguard the Stella Diamond’s single product (Helewitz, 2010). Stella Diamond has expressed reasonable concern that the use of her traditional recipe within the neighbourhood can have damaging impacts on her business. Angela as a senior pastry chef holds a senior position in the business and as such she is very aware of the material business secrets, which can have a detrimental impact on Stella Diamond if the restrictive clause was, disallowed (Meermann, 2014). In Faccenda Chicken Ltd. v. Fowler [1987] IRLR 69 the defendant was an employee of the claimant, serving as the sales manager of the firm selling chickens. His contract of employment was terminated and he then established his own firm selling similar products from refrigerated trucks. He took half of the ten van salesmen of his former employer, their controller, two other office staff and majority of his former employer’s customers. As such, his actions seemed legal because none of the employer’s staffs had restrictive terms in their employment contracts (Kessler, Bass, & Yeargain, 2007). However, in its decision, the court said the respondent owed the appellant an implied duty to act in good faith, specifying that the duty will be breached if an employee uses, in any way, the same list of clients of the former employer upon termination of the employment. General restrictions on ex-employees were however held as unenforceable (Meiners, Ringleb, & Edwards, 2011). Question # 1 (b) Angela has adequate grounds not to worry about the potential legal impacts of setting up a rival business within a reasonable distance from Stella Diamond’s. In Ranson v Customer Systems Plc [2012] EWCA Civ 841, the terms are valid as far as the narrowness of their focus is concerned. In Ranson the claimant sought to enforce non-compete terms allegedly limiting Ranson and his two colleagues from joining a firm he established while still working at the claimant’s firm. But in its response, the court declined the request on two grounds: a) the terms were vague in terms of the duration of enforcement; and the nature of employment they could not validly seek. Nonetheless, the geographical scope of four miles in radius from Stella Diamond’s business may be considered as reasonably specific and enforceable. Angela’s case is different from Landmark Brickwork Ltd v Sutcliffe and others [2011] where the court disallowed a vague non-compete term restricting any business activity in “the south.” In addition, like Mr. Sutcliffe’s illegal restriction from engaging in any business after termination of his employment in Landmark Brickwork Ltd, Angela’s restriction from any cake business is likely to be set aside on the grounds that it is too wide and thus will have no material losses on her former employer (Helewitz, 2010). In addition, Angela may argue that the nature and scope of business activities that Stella Diamond imposed in the contract are too wide to validly impede her legitimate interest in opening a cake business. Angela’s argument is supported by the fact that any other recipes apart from the traditional one used to prepare the black forest brand would be unfairly restricted. The argument would be supported by the recent ruling in Ashcourt Rowan Financial Planning Ltd v Hall [2013] EWHC 1185 (QB, where it was held that non-competition restrictive terms should be limited to activities that were reasonably important to safeguard the employers legal corporate interests. In this case, the employer lost on the grounds of too broad terms.   The covenant in Ashcourt Rowan Financial Planning Ltd v Hall [2013] EWHC 1185 covered not just the employee being clearly engaged with customers when serving a market rival or being tortuously involved in business processes, but it also encompassed indirect participation in such developments, for example, in ancillary capacity (Helewitz, 2010). The court established that there was no apparent justification for blocking the employee from participating in the business activities of the competitor in such secondary capacity. Furthermore, the fact that the employee in question was disbarred by the restrictive term not to participate in any business activity within a period of one year was also found to be too wide to enforce, as he could legally carry out internal duties which do not put him close to former or prospective clients of his ex-employer (Herman, 1991). Similarly, Angela’s intent to bake cakes which are not covered by the terms, within a reasonable distance from Stella Diamond’s is likely to be found as justified within the duration of the order. Garden leave  As Meiners, Ringleb and Edwards (2011) argued, Stella Diamond’s restrictive terms would have a more enforcement power if she had included a garden leave clause in Angela’s employment, running for a similar period of time. However, the decision in Symbian Ltd v Christensen [2001] IRLR77 effectively ruled out any late introduction of such clause as the respondent was subject to restrictive terms and a garden clause running six months into the post-termination period. He, however, disregarded the terms and sought employment in a market rival of his former employer ‘in a different, immaterial capacity’ (Harris, & McMillan, 2001). Additionally, in respect of the Court of Appeal decision in William Hill Organisation Limited v Tucker [1998] EWCA, Stella Diamond’s assumption that she has the discretion to enforce Garden leave in Angela’s case without the existence of a clear clause allowing it under the employment contract would not suffice (Mathis, & Jackson, 2010). As Estlund (2006) the Court disallowed an injunction request by an employer who neither included the clause in the employment contract nor specified that he would not assign any tasks to the employee (Pomeroy, 1981). Interestingly, the implied duty of a garden leave was granted in Provident Financial Group v Hayward [1989] IRLR 84, where the Appellate Court held that an employer who proves an implied duty of faithfulness would have their day. Moonlighting employee As far as moonlighting is concerned, Angela has an implied duty to work faithfully for Stella Diamond during the duration of her employment contract. But upon termination of the contract, the doctrine of moonlighting would not be enforceable. As such setting up the cake business after parting ways with Stella Diamond would not amount to moonlighting unless the employer proves that some of Angela’s clients are hers. In light of these arguments, Angela can validly start a rival cake business within a reasonable distance from Stella Diamond’s (Mathis, & Jackson, 2010). If Stella Diamond established that Angela is moonlighting, then the latter cannot make successful arguments against the employer’s restrictive terms of employment. In Evans v Lewis t/a The Beauty Spot ET/1403313/10 the employment tribunal established that unfair dismissal claims by Evans could not stand because he was suspected of moonlighting at the time the employer terminated the contract following later discovery of moonlighting evidence. Question # 2 (a) Mike Rawling as a would be father has the rights to take a paid paternity leave, which for the small organization should run for a minimum of two weeks upon the birth of the baby. Under Chapter III of the Employment Rights Act 1996, sections 80AA, Mike Rawling qualifies for the paternity leave on the following grounds: a) he expects to bear responsibility for the rearing of the child; b) he is the natural father of the unborn baby; c) he has worked for Wing Pie for an uninterrupted period of five years; and d) he has given the employer reasonable notice of the leave, which should be 15 weeks before the delivery of the baby (Miller, & Jentz, 2009). Nonetheless, if Mike Rawling failed to notify his employer about the paternity leave within the qualifying week he would not be entitled to the Ordinary Paternity Leave. As such, Wing Pie would be obligated to allow him some time off. Alternatively, he may be given a paid holiday. As Miller and Jentz (2009) suggested if Rawlings qualified for Ordinary Paternity Leave but lost the Ordinary Statutory Paternity Pay he may be entitled to income support during the minimum two weeks he will be on Ordinary Paternity Leave. Under such arrangement, Wing Pie would settle 90 per cent of Rawling’s average weakly dues for the two weeks which the employee will be on leave (Anzivino, 2010). The fact that the organization is still small and none of the five employees has come forward to ask for paternity leave before, the pay is likely to be kept at its minimum in order to avoid actions that could detriment the organization. This is especially true because the lean staff of five may encounter additional challenges when the manager is on leave. Regardless, Mike Rawling would have eight weeks from the day the baby is delivered to formally request the leave. Even though Mike, Rawling is eligible for adjustable paternity leave and earnings for up to 26 weeks, he may only enjoy the benefits if his baby will be born on or before April 5, 2015. The latest reforms which came into effect on December 1, 2014 under the Children and Families Act 2014 are set to rationalize paternity dues. Section 120 of the Act is particularly intended to cap the rights of those who qualify for paternity leave. Question # 2 (b) Rawlings has the rights to a flexible working arrangement following the coming into effect of Children and Families Act 2014, and the preceding Flexible Working Regulations 2014. From the day Rawling’s child is born until the time he or she will be 17 of age, he will be entitled to flexible working hours provided he proves that he intends to spend the time he will be away from the office caring for the child. Additionally, as Miller and Jentz (2009) said, his five years of employment by the small IT Company meets the 26-week threshold required of him to make a reasoned request for flexible shifts. However, Rawling’s employer will still be in control of the situation. The new legislation envisages the potential employer-employee conflict over the issue and or subsequent business losses by imposing an obligation upon employers to handle any such requests reasonably (Pattullo, 2013). In light of this duty, Rawling’s employer could reasonably deny him a flexible working shift on the grounds that he is the office manager of a lean staff of five in total. As such, giving him the flexibility would mean material losses to the business due to a lack of leadership. In addition, the employer may argue that the employee is not a carer, but if he intended to be one, he can trade-off the responsibility with his office duties and mandate his spouse to do the job or even hire a carer for the baby if the spouse was equally employed elsewhere. In Bryan v Corporate Advertising Ltd ET/2105111/10, for instance, the Employment Tribunal ordered £3,000 in punitive fines for an employer who reneged on the pledge, even though the company was preoccupied with redundancies. In the case, plaintiff Mrs Bryan’s claims of a reneged flexible work program which the employer had agreed to in principle after maternity leave, was granted. In light of this, Mike Rawling’s request for a flexible work may be granted if it does not have a material impact on the running of the business of five employees (Agrawal, 2013). Under such arrangement, the employer may expect him to report to work earlier than usual to organize the day’s work, leave three or four hours earlier than usual to complete the remaining tasks at home and return to supervise the work before his colleagues leave for home. Question 2(c) Article 8.3 (a) of the employment contract signed between Angela and Stella Diamond seeks to enforce complete non-dealing between the former and the organization’s clients, products, services, suppliers and financiers within the prohibited area. The restrictive term runs throughout Angela’s duration of employment and extends to a year after the termination of the contract. In TFS Derivatives Ltd v Morgan [2004] EWHC 3181 (QB) the court said the most important thing to consider when applying a restrictive covenant is its meaning when given a fine interpretation. In light of the decision, the non-dealing term prevents Angela from dealing in any way with all of the current and or former stakeholders and products of the employer upon quitting the job for purposes of preserving the business autonomy and projecting it as much bigger than individual interests such as those of Angela. The non-dealing clause arguably prevents any practical business relationship between Angela and the clients regardless of who makes the first move. Clause (b) seeks to prevent any current or prospective references which Angela could make to her new cake business in response to customer enquiries about the products offered by Stella Diamond’s business. If the decision in Beckett Investment Management Group Ltd & Ors v Hall & Ors [2007] IRLR 293, Stella Diamond’s prayers are likely to be granted on similar grounds. In the case, the court considered business realities in enforcing the restrictive covenant. The validity of Stella Diamond’s restrictive terms as specified under Article 8 of the contract are similar to the reasonable protections which arose in Thomas v Farr plc and Hanover Park Commercial Ltd [2007] EWCA Civ 118, where the Court held confidential information as legally protectable. In this case, Stella Diamond’s unique recipe warrants greater safeguards in the specific market, but not the vague freelances (Miller, & Jentz, 2009). The Court upheld the non-compete term in Thomas, which the employer sought to enforce for duration of one year (Ritter, & Rosenberg, 2007). By contrast, based on the verdict in Allan Janes LLP v Johan [2006] EWHC 286 the validity of the clause in Angela’s employment is likely to be upheld if the employer shows sufficient proof that the employee was exposed to a substantial number of clients, suppliers and her fellow employees (Meiners, Ringleb, & Edwards, 2011). In Allan, the Court gave effect to a restrictive term lasting for 12 months, within which the former employee was disbarred from dealing with past and prospective clients of his former employer within the market location of the firm. In a nutshell, the restrictive terms will arguably keep the business sustainable even if Angela’s employment contract ends, but it has the potential to make employees less free to ‘own’ the organization. References Agrawal, A., 2013. Restrictive Clauses. Money Today, p.4. Anzivino, R., 2010. Drafting restrictive covenants in employment contracts. Marquette Law Review, 94(2), pp.499-545. Emanuel, S. 2006. Contracts. London: Aspen Publishers Online. Estlund, C.L., 2006. Between rights and contract: arbitration agreements and non-compete covenants as a hybrid form of employment law. University of Pennsylvania Law Review, 155(2), pp.379-445. Harris, S., & McMillan, A.2001. Employment Contract: Get It In Writing! Financial Executive, 17(9), pp.28-31. Helewitz, J.A., 2010. Basic Contract Law for Paralegals. London: Aspen Publishers Online. Herman, A., 1991. One Employment Lawyers View of Employment Contracts: The Good, the Bad, and the Ugly. Marketing Research, 3(4), pp.8-13. Kessler, L.L., Bass, A.N., & Yeargain, J.W. 2007. You belong to me: employer attempts to keep employees from quitting to work for competitors via non-compete agreements in employment contracts. Journal of Legal, Ethical & Regulatory Issues, 10(2), pp.13-23. Mathis, R.L., & Jackson, J., 2010. Human Resource Management. New York: Cengage Learning. Meermann, E., 2014. The ins and outs of employment contracts. Westchester County Business Journal, 50(11), p.8. Meiners, R., E., Ringleb, A.H., & Edwards, F., 2011. The Legal Environment of Business. New York: Cengage Learning. Miller, R., & Jentz, G., 2009. Cengage Advantage Books: Fundamentals of Business Law: Excerpted Cases. New York: Cengage Learning. Pattullo, K., 2013. Make sure your employees have up-to-date contracts. Caterer & Hotelkeeper, 203(4764), p.40. Pomeroy, H., 1981. Restrictive covenants: what the CPA should know. Journal of Accountancy, 151(2), p.61. Ritter, D.B., & Rosenberg, S., 2007. The Ins and Outs of Non-Competes. Compensation & Benefits Review, 39(6), pp.40-46. Van O.J., & Hazans, M., 2008. Workers Valuation of the Remaining Employment Contract Duration. Economical, 75(297), pp.116-139. Read More