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Could this Supreme Court Case Impact on the Enforceability of your Employees’ Restrictive Covenants?

Employers await the Supreme Court’s decision in a case concerning a global executive recruitment company (or “headhunter”) and its ex-employee which could impact on the contracts of thousands of senior executives across the UK.

The Supreme Court was tasked with considering whether a non-compete clause in an employment contract, which prevented employees from being “concerned or interested in any business carried on in competition” within the six-month period after termination, was too broad.

Facts of the Case

Tillman worked at Egon Zehnder Ltd (EZ) from January 2004 to January 2017, eventually becoming co-Global Head of the Financial Services Practice Group.

Tillman subsequently notified EZ that she wished to start working for Russell Reynolds Associates (RRA) on 1 May 2017 (an American firm based in New York and carrying on a similar business).

EZ issued proceedings, contending that to do so would be a breach of the non-compete clause in question.

Tillman challenged this, claiming the non-complete clause was void for being “wider than reasonably required” for the protection of EZ’s interests – firstly, the lack of territorial limitation made the restriction unenforceable and secondly, it prevented her from having a minor shareholding in a competitor.

The High Court, granting an injunction against Tillman, held that the non-compete clause was valid and there were no reasons for not enforcing it.

The Court of Appeal decision

Tillman appealed to the Court of Appeal which overturned the decision and ruled in her favour.

Lord Justice Longmore held that the non-compete clause was too wide as it prohibited shareholdings (it prevented Tillman from holding shares in a competing business regardless of the size of her interest), was impermissibly wide and would be in restraint of trade unless it could be severed in some way.

Where do we go from here?

The Supreme Court is now considering the Court of Appeal’s decision.

Inserting a “non-compete clause” into an employment contract is a common way to stop (usually) senior employees from joining competitors or setting up in competition for a limited time. During the employment relationship, employees could be exposed to confidential information, trade secrets and customer/client details.

Non-compete clauses and other “restrictive covenants” aim to protect the employer’s business in the event that the employment relationship ends.

Such clauses must be drafted carefully, as any term which restricts an employee’s activities after termination of employment is void for being in restraint of trade and contrary to public policy unless an employer can show they have legitimate interests which require protection and that any such clause goes no further than is reasonably necessary for the protection of those interests.

If such a clause is too wide or vague in nature, a tribunal is likely to hold that the covenant is void and unenforceable.

Lessons to take from this in the meantime

Although the Supreme Court’s decision is pending, the case serves as a useful reminder of the need to:

  • draft specific and concise non-complete clauses (and restrictive covenants generally) at the outset of an employment relationship. There is no one-size-fits-all and each clause should be tailored to a particular individual or organisation;
  • regularly review employee contracts, and these clauses especially, as employees progress in the company (in Tillman’s case the provisions dated back to 2004 and her role had changed from Consultant to Principal to Partner in this time); and
  • ensure any changes to an employment contract as a result of reviewing these clauses is documented as being directly linked to a promotion, change of position or pay rise in order to avoid any disputes concerning consideration. There must be valid consideration when an employee enters into a new restrictive covenant later in the employment relationship (i.e. something received by the employee in return for him or her giving the covenant).

Once the Supreme Court publishes its judgment in this case, we’ll let you know.

Remember that we can help with drafting and reviewing contractual documentation and can be a sounding board for any concerns you may have in relation to the enforceability of post-termination restrictive covenants or other issues involving employees.  Please just give us a call.

If you would like to discuss anything further, please contact Employment Solicitor, Heena Kapadi, on T: 0161 358 0540 or E: heenakapadi@hrclaw.co.uk  or Dispute Resolution Associate, Sarah Armstrong, on T: 0161 358 0535 or E: saraharmstrong@hrclaw.co.uk.

This bulletin contains general overview information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.