Supreme Court decision should prompt employers to review restrictive covenants

For employers, the departure of a key employee from the business to a competitor can present real concerns about the future preservation of critical business assets such as clients, customers, suppliers and employees.  In this situation, the spotlight will shine brightly on the terms of any restrictive covenants which have been included in the employee’s contract of employment.

All too often, when the employment relationship is first entered into and the parties are on amicable terms, very little attention is given to the wording of post-termination restrictions.  However, on an employee’s departure the terms are suddenly brought into sharp focus and become of paramount importance.

The starting point is that post-termination restrictions are void on public policy grounds – so to even get past the starting-post, employers need to ensure the covenants go no further than is reasonably necessary to protect their legitimate business interests.

Case law over the years has given some guidance on when restrictive covenants will be upheld and, in this regard, one of the key factors which may come into play is whether any offending words which expand the scope of the covenants beyond reasonableness can be severed (“blue pencilled”) from the covenant in order to preserve the rest of the covenant.

This issue has been considered by the courts very recently in the case of Tillman v Egon Zehnder and employers will have had real reason to be concerned by the Court of Appeal’s judgment, which took an extremely limited approach to the severability of covenants.

However, Egon Zehnder has just been considered by the Supreme Court, and employers will welcome the news that the Supreme Court has taken a more liberal approach. The Supreme Court held that restrictive covenants can be severed if:

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

In this case, Ms Tillman was prohibited under a non-compete covenant in her contract of employment, from (amongst other things) being “interested in” any competitive business for a period of 6 months post-termination.  On her departure from Egon Zehnder for a competitor, Ms Tillman argued that the whole covenant restricting her from working at a competitor was unenforceable because the inclusion in the covenant of the words “interested in” were so wide so as to prevent her from having even a minority shareholding in a competitive business, therefore rendering the covenant void for going further than was reasonably required for the protection of legitimate business interests.  Although this argument found favour with the Court of Appeal, the Supreme Court held that the words “interested in” could, in fact, be severed, leaving the rest of the covenant enforceable.

Going forward, employers now have much more certainty about the law on this issue and can draw comfort from the fact that the enforceability of covenants may in some circumstances be ‘saved’ with the removal of any offending words.

However, the Egon Zehnder case, and the rocky road which it travelled to the Supreme Court’s judgment, should also serve as a strong reminder to employers that the drafting of restrictive covenants is supremely important – it is not something to be glossed over at the start of an employment relationship, but something which should be given detailed consideration, for each employee with whom covenants are going to be agreed.  More often than not, a one-size-fits-all approach simply won’t hold muster if enforcement of those covenants is sought down the line against an individual employee.  Further, covenants are not something to draw a line under once the contract of employment is in place. Employers should keep covenants under review, particularly in the event that an employee’s job role changes, for example through promotion – all too often this can be overlooked.

Employers should therefore take a prompt from the Egon Zehnder case and take a careful look at the drafting of their restrictive covenants for their key employees – but a word of warning; employers should not be complacent about relying on severance following Egon Zehnder. This is far from ideal; giving proper thought to the protection the business legitimately requires is likely to have much more prospect of deterring employees from anti-competitive activity in the future, or of upholding the covenants in the event of litigation.