Trade secrets

Employers sometimes insert restrictive covenants in employees' contracts so that they do not give away any trade secrets when they leave. But what happens if an employee is sacked for refusing to agree to them?

In Willow Oak Developments Ltd t/a Windsor Recruitment v Silverwood, the EAT has said that tribunals have to ascertain the reason for the dismissal, before going on to consider whether the covenant was reasonable.

What were the basic facts?

The claimants, all employees of a staff recruitment company, were dismissed when they refused to sign new contracts containing extensive restrictive covenants. They brought claims of unfair dismissal.

And the tribunal agreed, saying that the covenants were too wide. It decided that the company could not therefore rely on the defence of "some other substantial reason", within section 98(1)(b) of the Employment Rights Act (ERA) 1996.

Although the tribunal said that it did not have to consider the issue of fairness under section 98(4) of the ERA, it went on to decide that the procedure followed by the company was also unfair as the claimants were only given 30 minutes to read (and sign) what amounted to complex legal documents.

Nor were they warned that they would be dismissed if they failed to agree to them. Had the procedure been fair, the tribunal said the claimants would most probably have signed.

What did the parties argue on appeal?

The employer argued that the tribunal had adopted the wrong approach. They said that "all that is necessary is for the employer to establish that the reason for dismissal could be for a substantial other reason".

The question about whether the new contract was an unreasonable restraint of trade was not an issue for the tribunal to decide as such. Instead, this should just have formed part of its deliberations about whether the employer had been reasonable or not.

The employees, on the other hand, said that the tribunal had been right to rely on the case of Forshaw v Archcraft Ltd, in which the EAT decided that refusing to sign up to a covenant that was unreasonably wide could amount to a potentially fair reason for dismissal. And they argued that it was perfectly appropriate for a tribunal to consider whether the covenant was fair or not, at the same time as considering whether the employer could show a fair reason for the dismissal.

What did the EAT decide?

The EAT said that it was not "appropriate for the employment tribunal to decide the validity of a proposed covenant" (as it had not yet been imposed). Instead, the issue was whether it was reasonable to dismiss the employees for refusing to sign the new contract.

The tribunal should have followed three stages. First of all, it should have ascertained whether the reason for dismissal would pass the section 98(1)(b) test. Then it should have considered "whether the employer had a genuine belief that the dismissal for that reason was justified."

Finally, it should have considered the reasonableness of the covenants. If unreasonable, then the dismissal would probably be unfair. If they were arguably unenforceable, then tribunals needed to look at the employer's approach to the whole matter. But if they were plainly reasonable, then the dismissal was likely to be fair.

The tribunal had, therefore, taken the wrong approach at the section 98(1)(b) stage, as had the EAT in the earlier case of Forshaw.

However, the EAT upheld the overall decision of the tribunal that the dismissals were unfair, relying on its "alternative" not its "principal" reason that the procedure adopted by the employers had been unfair.