Employment contracts – Supreme Court considers restrictive covenants for the first time in 100 years

The Supreme Court’s recent decision on a non-compete clause provides useful guidance on the drafting of restrictive covenants, or post-termination restrictions as they are sometimes called, in employment contracts.

First a brief re-cap …

Restrictive covenants

Sometimes called post-termination restrictions (“PTRs”), these are provisions usually found in a contract of employment that stop an employee being able to do certain things for a defined period after their employment has ended. Restricted activities may include working for a competitor or soliciting clients or employees to join a new employer. They are a crucial weapon in an employer’s armoury to deter misbehaviour by former employees and to protect the employer’s business from employee competition.

Generally speaking, a PTR must not be any more restrictive on the employee than is reasonably necessary to protect the employer’s legitimate business interest (which may include confidential information, customer connections and goodwill, and the stability of the workforce).

PTRs need to be bespoke and they can be tricky to draft.  Too narrow, and the legitimate business interest can remain exposed. Too broad, and the covenant could be at risk of being unenforceable completely.

Unlike the approach to dealing with a breach of a commercial contract, when dealing with litigation relating to employee competition, the UK courts will not re-write an unreasonably wide PTR to make it reasonable.  However, as an exception to this, the courts may delete (sometimes known as “severance” or using a “blue pencil”) portions of a clause that are unenforceable if it does not affect the meaning of the remaining part of the clause.

The recent Supreme Court case: Egon Zehnder Ltd v Tillman [2019]

Ms Tillman was employed by Egon Zehnder, a multinational recruitment consultancy.  Ms Tillman’s contract of employment contained PTRs, including a clause which prohibited her from being “directly or indirectly engaged, concerned or interested in any business carried on in competition with any of [Egon Zehnder’s] businesses.”  Many employers use similar wording and the use of the phrase “interested in” is fairly common in PTRs.

The Supreme Court held that “interested in” included holding shares in any competing business and was therefore too wide rendering the PTR potentially void.  However, it then went on to consider whether those words could be severed or “blue pencilled”.  It held that the words “are capable of being removed from the non-compete covenant without the need to add to or modify the wording of the remainder. And, second, removal of the prohibition against [Ms Tillman] being ‘interested’ would not generate any major change in the overall effect of the restraints. So those words should be severed and removed.” Accordingly, the Supreme Court upheld the non-compete clause.

However, the Supreme Court warned that employers should not necessarily expect to recover their costs where they win, only because a judge has severed parts of the PTR which were not drafted correctly in the first place. On the issue of costs, it said that “there may be a sting in the tail” for employers.

What does this mean going forward?

The law on PTRs is constantly evolving on a case by case basis and this case is a reminder to take the time to get the drafting of PTRs right.

While an employer may be able to enforce a PTR that has been drafted too broadly if it can be severed or “blue pencilled”, it may be left with a hefty legal bill in doing so because the PTR was not drafted tightly enough.

In light of the Supreme Court’s decision, now is a good time to re-visit the PTRs in your employment contracts to ensure they are not drafted too broadly to be enforceable.

If you need any advice about existing restrictive covenants and their enforceability, or are looking to draft new PTRs, please contact our Employment team.