Unfair dismissal and restrictive covenants: Willow Oak Developments Limited (t/a Windsor Recruitment) v Silverwood and others Court of Appeal

Windsor is a recruitment company specialising in the supply of agency workers for the healthcare sector. In 2003 and 2004, two senior employees of Windsor left and set up a rival business, taking significant numbers of other employees with them. This led to the loss of much of Windsor’s client and candidate information and, subsequently, a reduction in its business.

As a consequence, Windsor’s directors asked all staff to sign new contracts containing detailed restrictive covenants. The employees were asked to sign these within 30 minutes of first being given them, in a busy working environment, without any proper opportunity to read and understand them.

Those who refused to do so were called in by the operational director and dismissed. They were offered new employment on the same basis as their old terms, but conditional on them accepting the new restrictive covenants. None were given formal warning that the sanction for non-compliance was dismissal, or that the meeting was a disciplinary or dismissal hearing. The dismissed employees brought unfair dismissal claims.

The tribunal first considered whether there was a fair reason in law for the dismissals under the category of ‘some other substantial reason’ (SOSR). It found that tighter restrictive covenants were necessary if Windsor was to prevent the poaching.
However, the covenants were found to be unreasonably wide and, therefore, unenforceable. Consequently, the tribunal held that there was not SOSR to justify these dismissals, and indicated that, in any event, it would have found the dismissals to have been procedurally unfair due to the lack of consultation.

At the Employment Appeal Tribunal (EAT) the decision was affirmed, but on different grounds. The EAT held that the dismissals could have been made on the ground of SOSR. If an employer can show that the reason for dismissal (refusing to sign the new contracts) could amount to SOSR (to prevent the poaching and protect the business), then there will be a potentially fair reason for dismissal, unless the employer acts capriciously, or uses it as an excuse to dismiss.

On further appeal, the Court of Appeal agreed with the EAT.

The reason for dismissal was that the employees had refused to accept covenants proposed by the employer for the protection of its legitimate interests, which could, in law, form grounds for dismissal. Therefore, a potentially fair SOSR was available to Windsor. The possibility that the covenant might not be enforceable was only one factor in determining whether the sanction imposed by the employer was reasonable. The Court of Appeal also agreed with the EAT in upholding the tribunal’s finding that the dismissal was procedurally unfair in any event.

by Joe Glavina, legal director, Addleshaw Goddard

Key points

  • A dismissal for refusing to accept restrictive covenants is capable of being ‘some other substantial reason’ for dismissal, unless the covenants are ‘in fact a cover or a ruse to get rid of an employee’.
  • Whether or not the covenants are reasonable is only relevant in deciding fairness, not when deciding the reason for dismissal.

What you should do

  • Make sure you have a sound business reason for requiring contractual changes.
  • Always consult with employees over any proposed contractual changes. Remember the collective consultation duty applies if 20 or more employees are being dismissed and re-engaged on new terms.
  • Give employees a reasonable opportunity to consider the changes and to take advice.
  • If dissenting employees are to be dismissed, give them prior warning and the opportunity of a meeting prior to dismissal. Also, make sure you follow the statutory dismissal procedure.
  • Be willing to negotiate the terms with employees – an ‘all or nothing’ proposal is more likely to be found unfair.

3 out of 5 stars

(Star rating: Each case is rated from one to five stars: the more essential it is that you know about it, the more stars it will have.)

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