Thou Shalt Not Compete! Restrictive Covenants Under the Spotlight
The extent and fairness of restrictive covenants in employment contracts came under the spotlight in the UK Supreme Court’s much-anticipated recent decision in Tillman (Respondent) v Egon Zehnder Ltd (Appellant) - the first case of its nature to reach Supreme Court level in England for more than a 100 years.
Restrictive covenants are a key feature of employment contracts which allow an employer to place certain restrictions on an employee when he or she leaves the company to pastures new. The extent and fairness of those restrictions however are often subject to dispute with the judiciary keen to maintain a balance between an employer’s right to protect his business and an employee’s right to make a living in a free market.
In Tillman, the Supreme Court chose to overturn a surprising 2017 Court of Appeal decision that had put in doubt the enforceability of many non-compete restrictive covenants.
The underlying facts were that Ms Tillman, an experienced recruiter, had resigned from her employment and sought to begin work with a competitor before the expiry of a 6 month restrictive covenant. Her employer applied for an injunction to enforce the covenant in her contract, which prevented Ms Tillman from engaging or being concerned “or interested” in any business carried on in competition with the employer’s business for six months from the termination of employment.
At first instance, the judge granted the injunction, but Ms Tillman successfully appealed. The Court of Appeal held that the covenant was unenforceable because it prevented Ms Tillman from holding as little as one share in a publicly quoted company, meaning it was too wide. Ms Tillman did not intend to hold such a shareholding; she merely sought to rely on the way the non-compete provision was drafted to render the clause too wide to be enforceable, meaning that she did not need to abide by it. The Court of Appeal also held that it was unable to sever the unreasonable part of the covenant and therefore the entirety of the non-compete covenant was unenforceable.
However, the Supreme Court held that whilst the wording ‘or interested’ contained in the covenant did prevent Ms Tillman from holding a nominal shareholding in a publicly quoted company, the offending part of the wording could be severed from the remainder of the clause to leave an enforceable non-compete restriction.
The decision effectively permits a Court to sever the wording of a restrictive covenant clause by deleting certain words if this does not result in a major change to the overall effect and tenor of the post-employment restrictions in the contract.