In the recent landmark case of Tillman v Egon Zehnder Limited, the Supreme Court considered whether words can be severed from a non-compete restriction clause in a contract of employment to rescue an otherwise invalid restraint of trade.
The Supreme Court held that words can be severed from a clause.
Facts of the Case
A former investment banker, Ms Tillman joined a management consultancy, Egon Zehnder in 2004.
Ms Tillman’s contract of employment included a non-compete clause preventing her from being “concerned or interested in” any competing business for 6 months after her employment ended.
After Ms Tillman resigned from her employment Egon Zehnder, she joined a competitor and her former employer sought an injunction to stop her relying on the non-compete clause in her contract of employment. In response, Ms Tillman argued that the non-compete restriction was unenforceable because it was too wide. In particular, she argued that being “interested in” a competitor business had the effect of preventing her from even holding any shareholding in a competitor.
The Court of Appeal ruled that the phrase “interested in” meant that Ms Tillman was not allowed to hold shares in a competing business and that this was unreasonable.
The Supreme Court agreed but said that the offending words can be removed from the clause without damaging the remainder of the covenant and as a result, the injunction could be restored.
The Supreme Court considered the following two factors to be crucial to the question of severance:
Application of the blue pencil test – There can only be removal of words if upon removal there would then be no need to add to or to modify what remains; and
Removal should not generate any major change to the overall effect of all the post-termination restrictions in the contract of employment.
This is a landmark decision and a victory for employers. This confirms that in certain circumstances a Court may be willing to come to the rescue where an employer has drafted post-termination restrictions in broad terms.
To minimise the likelihood of arguments over the enforceability of post-termination restrictions being raised by employees along with the associated time and legal costs, employers need to ensure that post-termination restrictions are carefully drafted and are tailored to the specific employee.
What are post-termination restrictions?
Post-termination restrictions (also known as restrictive covenants) can be included within an employee’s contract of employment to protect the business’ interests by restricting the employee’s activities for a period of time after the employee’s employment has ended.
Which post-termination restrictions to use?
Typical post-termination restrictions include the following:
Non-solicitation – This prevents an employee from soliciting or enticing customers or clients for a period of time after they have left your business. This type of restriction is often appropriate where an employee has a strong relationship with certain customers or clients;
Non-dealing – A non-dealing clause prevents an employee dealing with the customer or client where your customer or client approaches your former employee. This is more onerous than a non-solicitation clause where enticement or interference is required by the employee;
Non-poaching of employees – This prevents an employee poaching existing employees in your business for a period of time after their employment has ended; and
Non-competition – This type of clause can prevent the former employee competing against your business for a period of time after termination of their employment in certain capacities e.g. setting up in competition as a sole trader, partnership or limited company or working as an employee for a competitor.
It is vital to carefully draft restrictions
The only types of post-termination restrictions that are enforceable are those that protect a legitimate business interest. If yours does not, it likely to be seen as restraint of trade, and therefore not enforceable.
So it is important to carefully draft your clauses so that they take into account the specific role of the employee and your particular business. You should also ensure that you regularly review your post-termination restrictions, especially in the event that an employee is offered a role in a more senior position.
If you require any advice on the drafting of employment contracts or enforcing post-termination restrictions, please contact Farleys’ employment team on 0845 287 0939 or send us an enquiry online.