This week we are once again looking at covenants (groans) but this time through the lens of wrongful dismissal.
The question this week is:
Can an employer enforce post-termination restrictions against an employee who has been wrongfully dismissed?
Can the length of a notice period affirm a breach of contract?
The Claimants, Mr Brown, Ms Bhoma and Ms O’Reilly, worked for Neon, the Defendant. The Defendant had recruited the Claimants to establish a market leading underwriting team. Their contracts included terms for salary increases and discretionary bonuses. There were also significant post-termination restrictions due to the high-ranking roles the Claimants held.
Part of the Claimants’ contract included an agreement for profit commission, whereby they would share a portion of the profits generated by their performance. As the Defendant’s business was loss making overall, the Claimants requested this be ringfenced from the rest of the business.
The Claimants performed well in their role and consistently turned a profit in their department for three years. However, the Defendant reorganised the Claimants’ department and implemented some contractual changes. This included removing profit commission and changing how bonuses were paid.
The Defendant also made the payment of the Claimants’ bonus and salary increase conditional upon accepting these less favourable terms. The Claimants took this to be a breach of their contracts promptly resigned with notice. However, due to the Claimants’ seniority, these notice periods were long – in some cases over 12 months.
During their notice period, the Claimants felt further breaches of contract occurred. These included not calculating the Claimants’ profit share correctly, not making payments for salary and bonuses, making an unjustified finding of misconduct against the Claimants and reporting this to the Claimants’ regulator.
As a result of these further breaches, two of the three Claimants subsequently resigned with immediate effect. The Claimants brought claims for wrongful dismissal for damages in relation to the Defendant’s failure to pay them properly. They also sought a declaration of wrongful dismissal which would mean their post-termination restrictions were not enforceable.
The High Court held that by resigning with such long notice, the Claimants had affirmed the breach. However, as there were further breaches of contract during the notice the Claimant’s were entitled to resign without notice. As the Claimant’s resigned promptly after these further breaches they were wrongfully dismissed and the post-termination restrictions were not enforceable.
The takeaway point
No, if the contract has been breached the covenants will usually be unenforceable. The general rule is that the party who repudiated the contract cannot seek to enforce terms of that contract, this includes post-termination restrictions.
For notice, this case suggests that it is possible resigning with notice will affirm a breach of contract. In this case, as the notice periods were so long, it meant the breach would have been affirmed by working the full notice period. Interestingly, had the employer not behaved unreasonably during the notice period, it could have eliminated the risk of litigation as all breaches would have been affirmed over the notice period.