Employee Restrictive Covenants
Supreme Court Tilts the Balance in Employers’ Favour?
In a recent case, the Supreme Court ruled that a non-compete clause in an employment contract that prevented the ex-employee having a minority shareholding in a rival company was an unreasonable restraint on trade and therefore unenforceable. However, the Court concluded that the offending words could be removed, leaving the remainder of the clause enforceable. This is the first time in more than a century that the Supreme Court, or its predecessor the House of Lords, has considered the issue of severance.
In Tillman v Egon Zehnder, Ms Tillman was employed by Egon Zehnder as a consultant and then a partner in an executive search business. Her employment contract contained a series of restrictive covenants, including a non-compete term prohibiting her from being engaged or concerned or interested in any business carried on in competition with any of the Egon Zehnder’s businesses. When Ms Tillman resigned to go to another job, she indicated she accepted she was bound by the restrictive covenants apart from for the non-compete clause which, she said, was unenforceable as an unreasonable restraint of trade because the phrase ‘interested in’ prohibited her from holding a shareholding, however small, in a competing business.
The High Court ruled that the clause was enforceable on the basis that the phrase ‘interested in’ did not catch a shareholding. Allowing Egon Zehnder’s appeal, the Court of Appeal said that that was wrong. Furthermore, the Court ruled that the offending words could not be severed. This meant that the non-compete clause as a whole was unenforceable as an unreasonable restraint of trade.
On Egon Zehnder’s further appeal to the Supreme Court, the Court had to consider three points. Firstly, Egon Zehnder rather bravely argued that the restraint of trade doctrine did not apply at all to a prohibition on ownership interests such as shareholdings. This argument was rejected by the Supreme Court, which ruled that a clause of this type was classically caught by the restraint of trade doctrine. Next, Egon Zehnder tried to invoke the ‘validity principle’. The courts will normally strive to interpret a document in a way that renders it enforceable. However, the Supreme Court ruled that this principle only applies if there is ‘a realistic alternative’ reading. That was not the case here. It was clear from previous case law that the phrase ‘to be interested in’ a business includes holding shares in that business.
Finally, there was the severance point. The Supreme Court laid down the following principles: –
- First, the unenforceable term must be capable of being removed without the necessity of adding to or modifying the wording of what remains. This is the ‘blue pencil’ test.
- Second, what remains must still be supported by adequate consideration. This will seldom be an issue in employee restrictive covenant cases since the removal of the offending words will rarely affect what the employer has given in return for the covenants.
- Third, the removal of the provision must not ‘generate any major change in the overall effect of all the post- employment restraints in the contract. It is for the employer to show that this is so.
Applying these principles, the Supreme Court ruled that the phrase ‘interested in’ was severable, leaving the remainder of the non-compete term enforceable.
This decision is useful to employers however, the term needs to be drafted carefully. Heald Solicitors can provide clear advice and a targeted and focused team to address the real issues in each case. In such cases, less is more. Litigation is always an uncertain and costly business. In the Tillman case, the Supreme Court suggested that the employer might be penalised in costs if an overwide restrictive covenant becomes the subject of litigation.