· 2 min read · Features

Key contractual considerations when promoting employees


You might think that, from an HR perspective, promoting an employee ought to be a low risk exercise. Three reported cases in the last six months might make you reconsider.

First, look at the restrictive covenants.

In Patsystems Holding Limited v Neilly, a junior employee (who had a 12 month non-compete covenant in his contract) was promoted and sent a letter which recorded the promotion and specified that all other terms and conditions would remain unchanged, which he counter-signed.

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The employer's later application to enforce the covenant was rejected, with the court emphasising that covenants have to be evaluated at the point at which they were entered into, and here a 12 month non-compete covenant for a junior employee was not enforceable.

An invalid covenant will not be made valid by the fact that when the employer seeks to enforce it, the employee holds a more senior position. This emphasises the need for employers to undertake regular reviews of their employees' covenants, to ensure they are appropriate for their role.

Importantly, the court said that simply saying that all other terms (including the covenants) will remain unchanged on a promotion is not enough to amount to the introduction of a new covenant.

As a result of this, at the very least, employees should receive a letter which re-states and expressly renews their covenants with effect from the promotion. If the employee is being promoted to perform a key role, where the covenants are of particular importance, it is preferable to issue a brand new contract, to avoid any suggestion that the covenants are judged against the old role.

When promoting an employee, it is important not to forget to update their contract in general to reflect their increased seniority.

This was highlighted in Ranson v Customer Systems plc, which looked at whether a senior employee, whose very basic contract had not been updated since his early employment, was in breach of any fiduciary duties due to his senior position. The court held that, for a non-director, fiduciary duties only exist if they are expressly set out in the contract or are generally consistent with the contract's other terms.

In this case, the contract did not contain any express terms or terms generally consistent with fiduciary duties, and therefore the employer could not rely on a breach of fiduciary duties.

It is therefore imperative to make sure that senior employees are put onto contracts which contains express reporting obligations on them to report all matters of concern and imposes any other necessary contractual obligations equivalent to fiduciary duties.

The third problem area is also the simplest one. Have you actually got a signed contract back from the employee?

In FW Farnsworth and another v Lacy and others, an employee did not sign and return his contract, but was held to have accepted it because he subsequently made an application for medical insurance, which was only available under the new contract. Had he not done this, he would not have been bound by the terms of the contract and the employer would have been unable to enforce the restrictive covenants in the new contract against him.

Employers should diarise dates to check that signed contacts have been returned, in order to avoid any question of whether the contract is binding.

Taking these recent decisions together, employers should make sure that employees are put onto appropriate contracts when they are promoted, ensuring that any covenants are suitable for their new role. Although employers may want to avoid re-issuing contracts or issuing new ones on promotion, the above cases increase the number of occasions where this will be prudent.

Nick Robertson is head of London Employment Group and Laura Pharez (pictured) is associate of London Employment Group at Mayer Brown International