Welcome to CM Murray LLP. This site uses cookies, read our policy here.

Post-Termination Restrictive Covenants – What do Employers Need to Know?

The Supreme Court has handed down its judgment in Tillman v Egon Zehnder Ltd. The decision was eagerly awaited by employers, senior executives and employment lawyers alike – not least because it is the first employment competition case to reach the highest court in the UK in over a century.

The Supreme Court held that a restriction prohibiting a former employee from having any size of shareholding in a competitor was wider than necessary, but that the offending words could be deleted from the clause in order that the covenant be narrowed to allow the employer to enforce it.
The facts

Mrs Tillman was hired by Egon Zehnder Ltd as an employed consultant in 2004, at which point she signed a contract containing a 6 month non-compete restrictive covenant. Mrs Tillman was seen to be a “considerable prize” and there were “high hopes” of her future progress. She was promoted in 2006, 2009 and 2012.

In January 2017, she resigned her position as Co-Global Head of the Financial Services Practice Group and notified Egon Zehnder that she would be working for a competitor from 1 May 2017. Egon Zehnder sought an injunction against Mrs Tillman on the basis that she was in breach of the terms of her non-compete clause which sought to prevent her from being “directly or indirectly engage[d] or…concerned or interested in” a competing business until 30 July 2017.

Although Mrs Tillman’s restrictions had long expired by the time the case reached the Supreme Court, the case remained of interest because of the significant legal issues at stake in relation to the drafting and enforcement of post-termination restrictive covenants.

The law

In order for a restrictive covenant to be upheld:

  1. It must seek to protect the employer’s legitimate business interest; and
  2. It must go no further than is reasonably necessary to protect that interest.

Mrs Tillman argued that the restrictive covenant went further than was reasonably necessary to protect the business interests of the company. Mrs Tillman argued that, as the covenant sought to prevent her from being “interested in” a competing business, it was too wide as it could prevent her from being a minority shareholder in a competing business, for investment purposes. The fact that, in reality, Mrs Tillman was not proposing to become a shareholder in a competitor but was proposing to work for a competitor was irrelevant.

Mrs Tillman’s argument on this point, while rejected by the Court at first instance, was accepted by the Court of Appeal and the Supreme Court.

However, the Supreme Court overruled previous decisions and held that the offending words could be “severed” from the clause in order to make it enforceable against Mrs Tillman. In doing so, the Court provided new guidelines on the circumstances in which courts should allow deletion of certain provisions within a covenant as follows:

  1. The unenforceable provision must be capable of being removed without the necessity of adding to or modifying the wording of what remains; and
  2. The removal of the provision must not generate any major change in the overall effect of the post-employment restraints in the contract, which will be for the employer to establish.

What does this mean for employers when drafting restrictive covenants?

The Supreme Court held in this case that the unenforceable words could be deleted from the covenant in order to make it enforceable. However, it remains vital that employers exercise caution and careful thought when drafting restrictive covenants. In particular, if seeking to prohibit a shareholding or other interest in a competitor, consider including a carve-out for any minority or passive interest. While courts may, in limited circumstances, step in to rescue covenants that are cast too widely, they will not normally help employers who have simply drafted restrictions poorly and without due care, and the position remains that they will not add words to help a poorly drafted clause. There is likely to be significant argument in future litigation about whether deletion of a particular clause generates a “major change in the overall effect” of a restriction.

Restrictive covenants are important for any business seeking to protect its workforce, client and customer connections and confidential information. Poor drafting, or failing to carry out a regular review of restrictions, both in terms of the roles of the employees to which they apply, and any changes in the law, may not only result in costly litigation but may also result in loss of clients, customers, employees and trade secrets. The impact of such a loss can be huge for any business, affecting its reputation, client relationships, team morale, profitability and its ability to achieve its strategic goals. Accordingly, the importance of careful consideration, drafting and review of restrictions should not be underestimated.

Read the full Supreme Court Judgment in Tillman v Egon Zehnder Ltd here.

If you would like further information regarding restrictive covenant issues, please contact Beth Hale, Sarah Chilton or Merrill April.