Restrictive covenants: example 1: restrictions in the contract of employment
Section 225 ITEPA 2003
The following restrictions are set out in a contract of employment:
The employee shall not:
- work within a 20 mile radius of the company premises
- contact any customer or supplier of the employer.
Both restrictions apply for a period of 18 months after cessation of employment.
The employee was required to agree to the restrictions as conditions of the employment. No payment was made to the employee for agreeing to the conditions during the course of the employment.
The following line was included in a letter of termination:
“I confirm that the conditions set out in the contract of employment continue to apply for 18 months following the date of this letter.”
Section 225 does not apply as no consideration has been paid for giving the restrictive undertakings. No new undertakings were included in the termination agreement. The letter simply re-affirmed the conditions set out in the contract of employment.
As above but the letter of termination identifies a payment of £25,000 as consideration for the departing employee agreeing to abide by the terms of the contract of employment.
The sum of £25,000 is within Section 225 as it is paid for the giving of undertakings. The “giving” and the payment are linked even though time has elapsed between the 2 events.