Willow Oak Developments Ltd t/a Windsor Recruitment v Silverwood

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Demystify dismissals for some other substantial reason

While the implied terms of a contract will provide an employer a certain degree of protection during an employee’s notice period, the use of restrictive covenants within their contracts of employment will provide a higher level of protection for a considerable amount of time following the termination of their employment. They can prove to be invaluable in this regard when the information a former employee holds is of high value.

Restrictive covenants can prevent former employees from taking business and staff from an ex-employer, can prevent them from working for competitors and even prevent them from working within a certain radius. They are widely used and, depending your position, you may find that you have a number of restrictive covenants within your own contract; these are certainly worth making yourself aware of!

In the case of Willow Oak Developments Ltd t/a Windsor Recruitment v Silverwood, the Employment Appeal Tribunal (EAT) held that dismissing an employee for refusing to sign new restrictive covenants could be potentially fair for some other substantial reason, this is despite the fact that the covenants proposed were unreasonably wide and potentially unenforceable.

Whether the covenants were reasonable would be relevant to the fairness of the dismissal, taking account also of the employer’s behaviour in seeking to introduce new terms.

Willow Oak Developments Ltd

Background of the case

If an employer wishes to change an employee’s existing terms of employment, the usual process is to seek the consent of the employee. If they do not consent, an employer has the option of terminating their employment (on notice) and offering a new contract on the new terms. Importantly, this will amount to a dismissal and in certain instances, it may give rise to a potential unfair dismissal.

A tribunal must first decide whether the dismissal was for a potentially fair reason under section 98(1)(b) of ERA 1996. Provided the employer can show a sound business reason for the change, the dismissal will potentially be fair for “some other substantial reason” (SOSR).

The tribunal will then assess the fairness of the dismissal under section 98(4) of ERA 1996: the test is whether the decision to dismiss the employee for that reason was within the range of decisions which a reasonable employer, acting reasonably, could reach.

This will include a consideration of whether the employer followed a fair procedure. There are a number of different cases that give rise to this principle and it is common knowledge in employment law.

Restrictive covenants in an employment contract will be unenforceable unless they go no further than is reasonable to protect a legitimate business interest of the employer. In the case of Forshaw v Archcraft Ltd [2005] IRLR 600, the EAT held that a dismissal for refusing to sign a new contract containing unenforceable restrictive covenants could not be for SOSR and therefore the question of fairness would not arise.

Facts of the case

Windsor Recruitment (Windsor) was an employment agency supplying staff to the healthcare sector. There had been a number of attempts by competitors to poach Windsor’s staff and business, many of which had been successful.

Windsor was advised by its lawyers that the existing restrictive covenants in its employees’ contracts were not adequate to meet the degree of competition they were now facing from ex-employees or to prevent further loss of staff and confidential information to competitors. New contracts of employment were drafted containing a number of restrictive covenants.

The employees were presented with these new contracts on the 19^th of May 2003 and told that they had half an hour to read and subsequently sign them. No warning was given to the employees that refusal to sign the new contracts would result in dismissal. This was in a busy working environment and the employees had no proper opportunity to read and understand the contracts.

On 24^th May, one of the claimants requested an extra seven days to sign the document. They were told that, under no circumstances would there be an extension and, unless the documents were signed by the following day, none of the employees would receive the commission they had already earned.

A number of meetings took place with the employees, but these were not reasonable or conciliatory in tone. The Operations Manager behaved aggressively towards the employees, on account of his view (unreasonable, in the tribunal’s opinion) that some employees were preparing to leave whether the new terms of employment were given or not.

Queries raised by the employees about the contracts were not answered or were explained in a manner that left the employees confused. The employees who had not signed the new contracts (the claimants) were given notice of dismissal in a letter dated 4^th June 2003.

The letter offered alternative employment on fresh terms which were “no less favourable” than the employees’ current contracts “save that it will include the proposed amendments to the confidentiality clause and restrictive covenants”.

The claimants all brought unfair dismissal claims. The employment tribunal found that the new contracts contained covenants that were unreasonably wide and therefore unenforceable.

For example, the covenant not to poach Windsor’s employees would have prevented, for a 12-month period, the poaching of anyone who had ever worked for Windsor, unlimited by period or geographical area. The non-compete clause would have prevented employees, for six months, from working in any recruitment business (not only in the healthcare sector) regardless of their experience or knowledge.

The tribunal held that the refusal of the claimants to sign these terms could not amount to SOSR, and the dismissals were therefore unfair since the employer had failed to establish a potentially fair reason for dismissal.

The tribunal found, in the alternative, that if there had been potentially fair reason for the dismissals, they were not fair in all the circumstances since Windsor had not followed a fair procedure.

Windsor appealed, arguing that the tribunal had been wrong to decide that the claimants’ refusal to sign the covenants could not amount to a potentially fair reason. Secondly, it argued that the tribunal’s alternative finding as to fairness could not stand as it had been influenced by its principal (and wrong) finding as to SOSR.

Decision

The EAT allowed the appeal on the first point, finding that the tribunal had been wrong to rule out the SOSR defence merely because the covenants were unreasonable. However, it upheld the tribunal’s decision on the basis of its alternative finding that the dismissal was not fair in all the circumstances.

Some Other Substantial Reason (SOSR)?

The EAT decided not to follow the recent EAT decision in Forshaw because it was inconsistent with earlier authorities that had not been cited in that case, including St John of God (Care Services) Ltd v Brooks and others [1992] IRLR 546. The EAT thought that the ruling in Forshaw represented an unjustified exception to the general approach to SOSR cases. It must be noted that, while it is (evidently) not impossible for future EATs to overturn previous decisions, it is very unusual.

In St John of God it had been held that the reasonableness (or otherwise) of the new terms offered should not be determinative, because reasonableness must be assessed at the time of dismissal not the time of the offer.

In the EAT’s view, the decision for the tribunal was whether it was reasonable to dismiss the employee for refusal to sign the contract, and the reasonableness or otherwise of the contract must be looked at in context.

The EAT did not see any difference in principal between dismissal for failure to sign a contract containing terms which were unreasonably in restraint of trade and one containing other unreasonable terms. It was not for the tribunal to decide the validity of a proposed restrictive covenant.

The EAT held that the test in establishing SOSR is whether the reason for dismissal could be of such a kind as to justify the dismissal of an employee holding the position which the employee held. It must not be a “whimsical or capricious reason which no person of ordinary sense would entertain” (Harper v National Coal Board [1980] IRLR 260).

The EAT held that an employer with a genuine need for protection which seeks to introduce a covenant, and which acts on legal advice and following a fair procedure, could not automatically be held liable for unfair dismissal just because the covenant, after exact analysis, turns out to have been marginally too wide.

The proper approach to SOSR is that the reason for dismissal must not be whimsical or capricious and the employer must have a genuine belief that dismissal for that reason was justified.

Unless the circumstances are very exceptional, the reasonableness of the proposed contract arises only at the stage of considering whether dismissal was fair in all the circumstances.

EAT’s guidance on fairness

The EAT gave the following guidance to assessing fairness in cases such as this:

Where the proposed covenants are plainly unreasonable and put forward as “all or nothing”, or not severable, this may make it easier for a tribunal to conclude the dismissal was unfair.
Where the proposed covenants are arguably unenforceable and/or severable there will be a greater need to consider the employer’s approach, in particular the amount of time given to consider the proposals and any opportunity for the employees to take legal advice.
If the covenant is plainly reasonable then the tribunal will still need to consider the fairness of the procedure.

The EAT did not consider the tribunal’s alternative findings on the fairness of the dismissal to be irremediably flawed by its wrong principal conclusion on SOSR. The tribunal’s conclusion that the dismissal was unfair could encompass two different scenarios:

The covenants were enforceable, but the unfairness of the procedure rendered the dismissal unfair.
The covenants were arguably unenforceable and, this being a complex contract, it was not reasonable to ask anyone to sign it in the circumstances in which Windsor had asked its employees in this case.

The appeal would be dismissed.

Comment

This is an important decision by the President of the EAT, that reduces the risks for employers seeking to implement new restrictive covenants. Under the Forshaw decision, employers had to ensure that covenants were fully enforceable before dismissing any employees who refused to agree, and this took no account of whether the unreasonable parts of the covenants were severable or whether the employers had sought to negotiate with the employees.

Following Silverwood, it is now possible for an employer to fairly dismiss an employee for failing to sign up to a new covenant that would be unenforceable at common law. Provided the employer has genuine business reasons for the change, it will be able to establish a potentially fair reason for dismissal (SOSR).

The reasonableness of the proposed covenants is just one of the factors that would be looked at along with all the circumstances, including whether a fair procedure had been followed.

The facts of Silverwood are a very good example of what not to do when implementing contractual changes. An employer should clearly consult employees over the changes, give them a reasonable opportunity to consider them and to take advice, and answer any queries.

Dissenting employees should not be dismissed without being given prior warning that this would occur, and the opportunity for a meeting before dismissal takes place.

According to the EAT’s guidance in this case, a fair dismissal is more likely (but by no means guaranteed) if the employer has been willing to negotiate over the terms: an “all or nothing” proposal, particularly where the covenants turn out to be unreasonable, will be much more likely to result in a finding of unfair dismissal.

Read our four previous articles in this series here:

British Home Stores Ltd v Burchell

Vento v Chief Constable of West Yorkshire Police

Polkey v AE Dayton Services Ltd

Casamitjana v The League Against Cruel Sports

Willow Oak Developments Ltd t/a Windsor Recruitment v Silverwood – Legal landmark case