Restrictive covenants | Can ex-employees choose to ignore “unreasonable” elements of a clause?
Written by Hannah Kennedy on 12 February 2021
In order to thrive as a business, it’s important to protect the secrets of your success.
As such, a high-ranking employee deciding to leave to join a competitor or set up on their own can cause a great deal of anxiety for employers. There’s always the fear that an ex-employee may poach your clients or use their knowledge of your technology or strategic information to encroach upon your market.
For this reason, you may seek to protect your commercial business interests by embedding a clause (or set of clauses) into an employee’s Contract of Employment in order to restrict the actions they can take after their employment ends. These clauses are known as restrictive covenants; they offer contractual reassurance for employers that their connections and confidential information remain fully protected post-termination.
However, given their punitive nature, the default position of the courts is that such clauses amount to a restraint of trade and therefore can only be enforced if an employer is able to demonstrate that they were a necessary means of protecting legitimate commercial interests.
So what happens when an ex-employee seeks to defy a restrictive covenant, arguing that the wording is unreasonably broad? Can an element of a non-competition clause be removed (or “severed”) so that the remainder of the clause can still be enforced?
In a recent case, the Supreme Court has found in favor of an employer seeking to enforce a restrictive covenant which an ex-employee argued was an unreasonable restraint of trade.
Tillman v Egon Zehnder Ltd
The claimant in this case, Mary-Caroline Tillman, was employed by global recruitment firm Egon Zehnder and had worked her way up to become global head of financial services. As is common for senior staff, Tillman’s Contract of Employment contained post-termination restrictive covenants to prevent her from poaching the business’ staff, clients and knowledge, and to prohibit her from working directly for a competitor for a set time period after her employment with Egon Zehnder ended.
As mentioned, the use of restrictive covenants to inhibit an ex-employee from moving on to a new position is not typically considered lawful, and unless an employer can prove that they will suffer financial loss if not upheld, such clauses are difficult to enforce. Restrictive covenants must also be reasonable in terms of the time scale in which they apply and the geographical area they cover.
Importantly in this case, case law suggests that if part of a restrictive covenant is unenforceable, then the whole clause becomes ineffective.
When Tillman left the company in 2017 and took a job with a direct competitor firm soon after, Egon Zehnder responded by seeking an injunction to delay the move. Tillman made clear that she intended to comply with all of the covenants in her Contract of Employment apart from the non-competition clause, which prevented her from engaging with, or being “interested” in, a competitor for a six-month period. This, she argued, was an unreasonable restraint of trade and therefore legally void.
At the root of the issue here was the wording “interested in”, which Tillman argued prevented her from holding even a minority share in a competing company, and as such, was too broad a restriction to be enforceable. By extension, this would mean that the whole clause – including the part that sought to stop her from working for a competitor – was unlawful and should be removed. Egon Zehnder, however, denied that the clause should preclude Tillman from holding a minor shareholding in a competing business.
The High Court granted the injunction, agreeing with Egon Zehnder that the words “interested in” did not have this effect. Because of this finding, the question of whether these words could be severed from the rest of the covenant became irrelevant.
The Court of Appeal subsequently overturned this decision. In its view, the words “interested in” did restrict even a minor shareholding. However, in relation to whether this wording could be removed from the rest of the clause, it refused to do so on the basis of relevant case law. Accordingly, this rendered the whole clause unlawful.
In an unprecedented move, the Supreme Court granted Egon Zender permission to appeal – the first time ever that it has considered the law surrounding restrictive covenants. At this stage, the case boiled down to two key questions:
- Did part of a restrictive covenant in Tillman’s Contract of Employment constitute an unreasonable restraint of trade?
- If so, could this portion be redacted while leaving the rest of the covenant intact?
Based on these considerations, the Supreme Court found in the employer’s favour. It ruled that even if parts of the covenant were unreasonable, as the Court of Appeal had suggested, this wording could be removed without compromising the validity of the remaining non-competition clause.
Expert Comment from James Tamm, Director of Legal Services at WorkNest:
This is a welcome decision for employers. The sort of clause in question is pretty commonplace, and if it were ruled to be unenforceable, there would have been much work to do for employers up and down the country to redraft and redistribute their contracts of employment.
The case also highlights how important it is that restrictive covenants are bespoke and carefully drafted. Many employers will tend to use “off the shelf” wording and sometimes that will not be fit for purpose. With senior employees, employers should apply their mind to the exact legitimate interests they are trying to protect with the clause and ensure the wording reflects that.
The key, as ever, is taking advice and ensuring your contracts are drafted by Employment Law experts.