A recent case before the Supreme Court, Tillman v Egon Zehnder Ltd, has found unenforceable wide wording can be cut out of a non-compete restrictive covenant in an employment contract, enabling the remaining wording to be enforceable against the employee. This outcome has laid out when courts are able to do this, making it an important issue for employers to be aware of.
What is a restrictive covenant?
A restrictive covenant is a clause outlined in a contract that forbids an employee from competing with their former employer for a specified period after the employee has left the business. It can prohibit the former employee from soliciting or dealing with customers of the business by using information regarding those customers obtained during their previous employment. All businesses have sensitive and valuable information that plays a key part in its success. Preventing the use of this information by former and current employees through restrictive covenants offers protection to businesses and its contacts.
Although the Courts acknowledge there is a clear need to enable employers to protect their businesses from former employees, there is also acknowledgment that employees should not be unreasonably restricted in what they can do after the end of their employment.
What happened in Tillman v Egon Zehnder Ltd?
The case involved Ms Tillman, an employee in a senior role at Egon Zehnder, who attempted to free herself from a non-compete restriction that outlined that she would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any business of the Company…” for six months after her employment terminated. It was claimed by Ms Tillman that the wording used was too wide and therefore unenforceable. The restrictive covenant prevented her from having any “interest in” a competing business, meaning she couldn’t even have a minor shareholding for investment purposes.
Egon Zehnder applied for an injunction to uphold the non-compete clause, which was granted by the High Court, but then later overturned by the Court of Appeal. The non-compete clause was held by the Court of Appeal to be unenforceable for being an unreasonable restraint of trade. The words “interested in” could not be severed from the rest of the clause and leave a valid covenant, therefore making it void.
Egon Zehnder appealed, and the Supreme Court held that the words “interested in” could be severed. This is because their removal would not result in a need to add to or modify the remainder of the covenant. Also, the removal of the words would not result in any significant change in the overall effect of the restraints in the contract.
Future impact
This case has outlined the test surrounding the use of severance, which is:
- The offensive words must be able to be removed without the need to add to or modify the wording of the remaining terms
- The remaining terms must be supported by adequate consideration
- The removal of the unenforceable provision would not generate any significant change in the overall effect of all the post-employment restraints in the contract.
Simon Thomas, partner specialising in employment law at Hutchinson Thomas, said:
“The outcome in Tillman v Egon Zehnder Ltd has overturned a principle on competition clauses that is more than a century old. Even though the decision in this case will give some assurance to employers that a poor covenant can be saved through the severance of words, it highlights the importance of having employment contracts that are carefully drafted.
“Restrictive covenants should always be meticulously drafted, tailored to individual employees and should not go beyond what is reasonably necessary to protect your business from departing employees. Reviewing contracts in line with an employee’s progress and the changing landscape of a company is also imperative.”
For more information on restrictive covenants and other employment law matters, contact Simon Thomas on 01639 640164 or email simon.thomas@hutchinsonthomas.com