Supreme Court’s historical decision: review employee post-termination restrictions!
Updated: Jul 7, 2022
A landmark case
For the first time in 100 years the Supreme Court has scrutinised an employee non-competition clause. The focus in the case of Egon Zehnder v Tillman was on how the clause had been drafted and whether it was unreasonable.
What was under the spotlight?
Ms Tillman a long standing member of staff in the recruitment business of Egon Zehnder decided to leave and join a competitor. The employment contract contained a relatively standard post-termination restriction preventing Ms Tillman from working for a competitor for a period of six months. More specifically, she agreed not 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…”
Key considerations for the Supreme Court
The central issue was whether the non-competition clause was unenforceable; Ms Tillman argued that “interested in” prevented her from holding even a minor shareholding in a competitor, which would be an unreasonable restraint.
All post-termination restrictions are treated as void on public policy grounds. An employer must therefore ensure that a covenant goes no further than is reasonably necessary to protect its legitimate business interests; these interests are commonly confidential information and trade secrets, client/customer relationships and the workforce.
There are specific elements of a covenant that will be scrutinised when there is a dispute over the reasonableness of the restriction. Common elements being the duration or geographical scope of the provision. One other key factor often relied upon is whether any words which render the covenant unreasonable can be severed from the restriction to render the rest of the covenant enforceable.
As the lower courts could not agree on whether the clause in Ms Tillman’s contract was reasonable, the Supreme Court was required to intervene and decide whether the words “interested in” rendered the clause completely unenforceable or alternatively, by severing the offending words left Egon Zehnder with the protection of the remainder of the clause.
The Supreme Court considered the clause and concluded that the inclusion of the words “interested in” rendered the clause unenforceable as an unreasonable restraint. It confirmed however that by removing the offending words, Egon Zehnder was left with an enforceable non-competition clause.
The clarity from the Supreme Court should give employers more confidence when it comes to enforcing employee post-termination restrictive covenants. In the future, the courts will be prepared to cut out offending parts of a clause so that what remains becomes reasonable and enforceable.
Employers should not see this case as a green light to introduce wider and more restrictive clauses in the hope that if there is a dispute, the courts will apply a similar approach to the one adopted in this case.
The courts will never excuse poor drafting and will not re-write a clause; severance will only be used if the remaining parts of a clause make sense without adjustment to the overall effect of the restriction. Given this, severance should only be relied upon as a last resort, as it may not provide an absolute solution to restricting the competitive activities of an ex-employee.
The priority for employers
Employers should make properly drafted post-termination restrictions a priority and avoid a one-size fits all approach. To provide greater protection, regular reviews throughout the employment relationship are also important to identify if new restrictions need to be introduced in response to business change and job promotions.
If you want to protect against post-termination competitive activities, please contact a member of the team at FG solicitors by sending an email to firstname.lastname@example.org or by calling 01604 871143.