When employees move on — what’s changed with restrictive covenants?

Restrictive covenants are often the bane of employment lawyers' lives, not to mention those of employers and employees.

Employers want the widest restrictions possible, yet the law’s default position is that these broad restrictions are not enforceable because they limit employees’ ability to ply their trade.

Instead, the law will only recognise and enforce the clause if it seeks to protect ‘legitimate business interests’ and no more.

And that means there’s a lot to consider when drafting these provisions, including how long should the restrictions last for, what activities should be prohibited post-termination, and how wide the geographical area preventing competition by the ex-employee should be.

These things are extremely fact sensitive and can’t be resolved by a trip to the styles bank or a quick cut and paste from your most recent employee’s contract.

Drafting considerations

Things to bear in mind include —

  • What are you seeking to protect and why? The provisions should do no more than protect a legitimate business interest or asset
  • Who is the covenant directed at and what is their value to the business? What are appropriate restrictions for a senior manager with many years’ service will not be appropriate for a newly employed junior admin assistant
  • How wide do any geographical restrictions on competition actually need to be? It might be reasonable to restrict a senior manager in a niche company from working for six months in the UK, but is unreasonable to apply the same restriction to a hairdresser working in a local salon

But here’s the rub.

Even if you have carefully drafted your restrictive covenants, what if one provision is deemed to go too far? Does that spell disaster for the entire clause, allowing your prized ex-employee to immediately start work with your main competitor?

Not long ago the answer to that question was usually yes: if one provision within a clause was held to be unenforceable, the whole clause fell.

But on 3 July this year, the Supreme Court delivered welcome news to employers: if one part of a provision is held to be unenforceable, provided the rest of the clause makes sense without it, a line can simply be drawn through the unenforceable part and the untainted part remains enforceable.

In the decision of Tillman v Egon Zehnder Ltd the Supreme Court was asked to consider a restrictive covenant whereby Ms Tillman had agreed that she would 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”.

Mrs Tillman argued the words “interested in” were too wide and were an unreasonable restraint of trade. By way of example she complained the words were so wide that they prevented her from even having a shareholding in a competing business.

That, she argued, meant that the whole clause was void.

The court’s decision

The Supreme Court disagreed and allowed the offending provision to be severed, leaving the rest of the clause intact and enforceable.

Ms Tillman could directly or indirectly be interested in a business in competition with her former employer, but could not engage or be concerned with the competing business. It may appear to be semantics, but meant Ms Tillman was still prevented from working for a competing business for the duration of the covenant — although rather ironically the court action took far longer than the six-month restrictive covenant at stake.

However, Tillman v Egon Zehnder is not a get out of jail free card.

To be enforceable restrictive covenants must still be carefully drafted and tailored to the situation at hand. It does, however, give employers some comfort that an otherwise reasonable covenant will not fall due to one overly restrictive provision.

Rebecca Walker

Senior associate Rebecca Walker specialises in commercial litigation, with a particular focus on both personal and corporate insolvency. Alongside her work on insolvency matters, she handles a wide range of commercial disputes, debt recovery and is also experienced in planning and environmental law.

Posted, 17 July 2019 by Rebecca Walker
Categories: Employment | Litigation