Employers in certain industries, particularly those that involve sales, client lists and valuable confidential information, often include Restrictive Covenants (RCs) in their employment contracts. RCs are designed to prevent the employee from doing certain things when they leave, such as poaching customers or employees, or working for competing organisations.
However, just because the contract contains RCs does not necessarily mean that a court will enforce them. Employers don’t have carte blanche to impose any post-employment restrictions that they want, and a court will generally not enforce RCs that it sees as an unreasonable restraint of trade. The basic premise is that RCs should go no further than what is necessary to protect the employer’s legitimate business interests. That of course is a difficult thing to assess.
Where it becomes more complex is where there are several RCs in a contract, some of which may be reasonable and others which aren’t. Or, it could be that one RC is worded in such a way that one part of it is unreasonable. Whether the rest of the RC can still be enforced is the tricky question answered by the Supreme Court (SC) in this case.
The facts of the case
Ms Tillman had a RC in her contract with Egon Zehnder (EZ) that did not allow her to ‘directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company’ following the termination of her employment.
However, Ms Tillman left EZ and began working for one of their competitors. In response, EZ raised proceedings against her to enforce the RC in her contract. Ms Tillman argued that the restriction went beyond what was reasonably necessary and as such should not be enforced.
Ms Tillman’s argument focused on the words ‘interested in’ in the relevant RC, and she stated that that wording meant that she was prevented from having even a small shareholding in a competitor company. Ms Tillman further argued that that part of the RC rendered the entire restriction unreasonable, and that the ‘interested’ part could not be removed from the RC to allow the rest to be enforced.
The SC’s decision
Prior to being heard at the SC, the Court of Appeal (CA) heard the case and agreed that the inclusion of ‘interested in’ was unreasonable, which meant that the entire RC was unenforceable.
However, the SC overturned that decision. The SC agreed that preventing an interest in a competitor was too wide a restriction, but went on to find that those words could be ‘severed’ so as to render the remainder of the RC enforceable.
The SC did point out that this would not always be possible, and that the following questions should be considered when deciding whether severance is possible:
- Can the unenforceable wording be removed without having to add to or modify the remaining words?
- Does removing the unenforceable wording create any major change in the overall effect of all the post-employment restraints in the contract?
The SC also made it clear that ‘the courts must continue to adopt a cautious approach to the severance of post-employment restraints’.
What does this mean?
This decision is undoubtedly helpful to employers, as it potentially allows them to ‘save’ RCs by cutting out any parts that are unreasonable.
However, as the old adage goes, prevention is better than cure, and the prudent employer will more readily rely on well-drafted RCs rather than an ability to use severance as EZ did in this case. Employers are therefore encouraged to consider what legitimate business interest they wish to protect, and whether RCs are required to provide that protection. Particular thought should be given as to how wide (e.g. geographically) and for how long the RCs should take effect.
In general terms it will be easier to enforce non-poaching RCs than non-compete ones, as the courts are more willing to protect customers and employees from being stolen than preventing where an employee can work after leaving.
Similarly, restricting senior employees is usually more permissible than curtailing what junior employees can do, as junior employee tend to have less exposure to trade secrets, and as such there is less risk of damage being done when they leave.
Separating out various RCs as far as possible is generally a good idea, as again it may be easier for an individual clause to be ruled out than having to worry about whether particular words can be removed from a sentence without affecting the integrity of the rest (as happened in this case).
It may also be helpful to include exceptions within RCs, such as allowing a small shareholding in a competitor of perhaps up to 5%. Had Ms Tillman’s RC contained such an exception, she might not have had a case at all.
If you have any questions on any of the issues raised in the above article, please contact Seanpaul McCahill.