A recent case which had ended up at the Supreme Court, contemplated the restrictive covenants put in place by an employer to prevent possible damages to Business from former employees moving to a competing business.

Restrictive covenants can be a useful tool in an employer’s arsenal to prevent departing employees from taking advantage of confidential information or poaching clients or fellow colleagues. They may attempt to use this information for the benefit of a rival company, or to set up their own competing business, which can seriously damage the former employer’s business.

The wording of restrictive covenants, however, can be tricky to get right. The default position is that a restrictive covenant will be void and unenforceable for being in restraint of trade unless the employer has a legitimate proprietary interest to protect, and the protection sought is no more than is reasonable in the circumstances.

When drafting a non-compete restriction, which prevents former employees from joining rival companies for a defined period of time, it is usual for the employer to exclude any minor shareholdings (usually up to 5% of a company’s share capital) which may be held by the employee as an investment. Otherwise this would prohibit holding a single share in a competitor’s business, which would undoubtedly be held to be unreasonable.

In the case of Tillman v Egon Zehnder Ltd [2019] UKSC 32, the Supreme Court was asked to consider whether the unreasonable part of a restriction could be severed, leaving the rest of the clause intact and enforceable.

The employer in this case, Egon Zehnder (EZ) was an executive head-hunter firm. Mrs Tillman joined the company in 2004 and was promoted at various stages until she was eventually made a partner. Her contract of employment included a non-compete clause which prevented her, for six months from termination, from being “…directly or indirectly engaged or concerned or interested in any business carried on in competition with any of the businesses of the Company…”.

She resigned from EZ in January 2017 and commenced new employment with a competitor in May 2017. EZ alleged this would constitute a breach of her non-compete restriction and sought an injunction.

Mrs Tillman argued, amongst other things, that the non-compete clause was void for being wider than reasonably required. In particular, she argued that the prevention from being “interested in any business carried on in competition” was too wide as it could prevent her from holding even minor investment shareholdings in competitor companies.

Originally, the High Court concluded that the restriction was valid and granted an injunction in favour of EZ. Mrs Tillman appealed and the Court of Appeal overturned the injunction, holding that the restriction was drafted too widely and was therefore unenforceable.

EZ appealed to the Supreme Court. The Supreme Court found that although the words “interested in” did prohibit any shareholding and was therefore unreasonable, these words could be deleted from the restriction leaving the rest of it intact and enforceable.

This decision has restored the test for severance set out by earlier case law, in that the bad part of a covenant may be deleted if:

  • the unenforceable part of the restriction can be removed without the need to change the remaining wording;
  • the remaining terms continue to be supported by adequate consideration (in an employment context, this is usually the payment of salary); and
  • the removal of the unenforceable part of the restriction does not change the character of the contract so that it is no longer the sort of contract the parties first entered into.

Although this decision has arguably loosened the severance test quite significantly to make it easier for courts to delete unreasonable wording, whilst still enforcing the remaining restriction, it came with a word of warning to employers.  The court was critical of the fact that the clause was poorly drafted in the first place. The court went on to say that there may be a sting in the tail for employers who purposefully draft wide restrictions in the knowledge that the courts will clean up their mess. The strong implication is that employees should not have to bear the costs of clearing up an employer’s drafting mistakes, and so there may be costs implications for employers who take this approach.

This decision reinforces the importance of ensuring that clauses of this nature are drafted with care, and that severance provisions should only be used as a last resort, not as a ticket to draft unreasonably wide restrictions.

If you need any advice on drafting, enforcing or defending restrictive covenants, please do not hesitate to contact Kathryn Moorhouse on 0113 280 2231 or kathryn.moorhouse@luptonfawcett.law otherwise feel free to contact another member of the employment law team.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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