Employment post-termination restrictions - case law update
06 December 2019
Post-termination restrictions (PTRs) attempt to bind an employee for a set period after their employment has come to an end. These restrictions include working for a competitor (non-compete), contacting former clients (non-solicitation/non-dealing) and approaching former-colleagues (non-poaching). These restrictions are generally considered to be unlawful unless the employer can demonstrate that they have a legitimate business interest that needs to be protected and the restriction imposed on the employee is reasonable.
In an earlier article we detailed the significance of post-termination restrictions in employment contracts and the importance of getting the balance right, as clauses which are too restrictive are deemed unenforceable. However, the UK’s Supreme Court has now declared that in these circumstances part of a PTR could be “severed” leaving the remainder of the restriction enforceable. This was the determination made in the case of Egon Zehnder Ltd v Tillman which has far-reaching consequences for employers and employees alike, and highlights the importance of including properly drafted PTRs in employment contracts.
In the case of Mrs Tillman, she was bound by a non-compete clause preventing her from being “concerned or interested” in any competing business for a 12-month period. This clause not only prevented her from working for a competitor, it also prevented her from even having a minority shareholding in a competing company. This would be like preventing a former Apple employee from buying shares in Samsung through the stock market. This clearly goes beyond what is reasonable to protect their business interests and the Supreme Court in their judgement also confirmed that the original restriction was too wide. However, it also determined that the words “or interested” could be severed from the restriction to leave the rest of the clause enforceable:
“directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses”
When considering the principle of severance, the Court has to consider if:
(i) the unenforceable words can be removed without having to add or change the remainder of the clause
(ii) the removal of the unenforceable provision changes the character of the contract that it becomes not the sort of contract that the parties entered into at all
In this case, the words “interested in” could be removed without having to change the remaining wording and without generating a major change to the overall effect of the contract. This case could be seen as contrary to the position previously adopted by the UK courts, in which they are generally reluctant to make amendments to restrictive covenants. It is not the business of the court to convert an unenforceable clause into an enforceable one.
The principle of severance essentially saved the employer in this instance, however, this was mostly good fortune in relation to word choice rather than any grand design. Moreover, the company still had to contest this issue in the High Court, Court of Appeal and the Supreme Court for over two years to obtain this judgement. At the same time, a properly drafted clause entered into the employment contract at the outset may have prevented this issue from even arising.
While this case may be seen as a victory for the Company, it should stand as a reminder to all employers about the importance of properly considered and well-drafted contracts.
If you would like advice or assistance with drafting employment contracts including post-termination restrictions, please contact our employment team.
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