Don’t leave it to the judges to protect your business!

Insights - 26/07/2019

The Supreme Court has recently heard its first employment case on restrictive covenants for a hundred years. The landmark 2019 case of Tillman v Egon Zehnder Ltd addressed the enforceability of a post-termination restrictive covenant prohibiting a departing employee from working for a competitor.  Such clauses can be of vital importance to businesses seeking protection from  the activities of departing employees and competitors.

Egon Zehnder (EZ) specialises in executive search and recruitment. Ms Tillman (T) joined EZ in January 2004 as a Consultant. At the time of her recruitment, EZ recognised T’s abilities and expected to promote her. T was quickly promoted to Principle in 2006 and to Partner at the earliest opportunity in 2009. By 2012 she was Joint Global Head of EZ’s Financial Service Practice Group.

T’s original employment contract was not updated with her promotions but it did contain a number of post-termination restrictions including this clause preventing her from working for a competitor:

“You shall not … directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period.”

When T’s employment ended on 30 January 2017 she intended to work for a US competitor and in order to do so, argued that the clause was an unreasonable restraint of trade and therefore unenforceable. The focus at the trial was on the fact that by preventing her from being ‘interested’ in any business she was even prevented from holding a minority shareholding in a competitive business which went too far.

EZ sought an injunction preventing T working for their competitor and the courts had to determine whether or not the covenant was enforceable.

Ultimately the Supreme Court held that a covenant which sought to prevent employees from having ‘any interest’ in a competing company would be unenforceable but that the offending unlawful provision could be “severed” from the restriction in order to create an enforceable clause.

The Supreme Court’s test for severance was that: the words must be capable of being removed without the need to add or modify the remainder; the remaining terms must continue to be supported by adequate consideration (not normally an issue in post-employment situations) and the removal of the words must not cause any major change in the overall effect of the restraints.

In this case and applying this test, the Supreme Court held that the non-compete clause could be enforced with the deletion of the words ‘or interested’. EZ could breathe a sigh of relief on this occasion but prudent businesses should not leave it to the court to protect your business.

Action points for employers

  • Don’t rely on ‘blanket’ one size fits all restrictive covenants, especially those set out in staff handbooks. Have a clear understanding of the business interests which you are seeking to protect and the role of the employee at the time the covenants are being entered into and tailor the restrictions accordingly. It is worth spending time on this task;
  • Don’t treat the courts power to “sever” an unenforceable section of a restriction as a reason to draft unnecessarily wide covenants. In this case the Court commented that EZ could be liable for costs because of the ‘legal litter’ in their restrictive covenants that others had to tidy up;
  • Keep your restrictions under review, particularly if there are any changes to the business or to an employee’s role; and
  • Ensure all contracts of employment are signed.

Should you have any questions on the issues set out here contact your usual adviser in the employment team or Emma McLoughlin at [email protected] or by phone on 020 8971 1088.

Other articles from July's newsletter

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Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.