By Lisa Rix - 31 January 2018
Earlier this month, the Supreme Court heard the appeal in Tillman v Egon Zehnder Ltd, in which a six-month non-compete restrictive covenant was found to be invalid. The restriction, which sought to prevent a former employee from being “concerned or interested” in any competing business, was deemed impermissibly wide because the phrase "interested in" included holding one share in a publicly quoted company – this was despite a reference to shareholding in the clause already being removed by the court. This will be the first case regarding the construction of an employment restrictive covenant to be decided by the Highest Court in the Land in over a century. Its progress has been keenly tracked by many; see our previous article on this case here.
Whilst awaiting the Supreme Court’s final say on the enforceability of post-termination restrictive covenants (“PTRs”) such as this, we have set out below the critical issues that employers need to consider when reviewing the drafting of their own PTRs.
Give them Legitimacy
The starting point is that any PTR is void for being in restraint of trade and contrary to public policy.
Nonetheless, they can be enforced if the employer can show that: (a) it has a legitimate business interest that it is appropriate to protect; and (b) the protection sought is no more than is reasonably necessary having regard to the interests of the parties and the public interest.
What exactly are ‘legitimate business interests’? They include:
Most employers will be able to show they have some legitimate interest to protect.
Have Reasonable Expectations
Assuming you get over the legitimate interests test, you then have to assess whether the protection is no more than is reasonable. The bottom line is that you cannot stop your employee from dealing with the world. Instead, the courts will consider a number of factors when considering enforcement:
Time is of the Essence
Restrictions are judged at the time the contract of employment is entered into, not at the time the current employer is seeking to enforce the restrictions. Therefore, restrictions should be drafted to be appropriate for the role the employee is being hired for. As the employee gets more senior or gets promoted, the employee should sign up to new restrictions.
Having employees sign up to new restrictive covenants as they get promoted is important, as the promotion is usually seen as adequate consideration for the restrictions being signed. But beware, annual or guaranteed pay rises may not be suitable for the same purpose.
Cut your Losses
Ensure severance clauses are drafted into your contracts to allow a court some flexibility if they need to ‘blue pencil’ anything. It is better to have the court cull some of your PTRs than strike the whole section down as unenforceable.
In situations where it is business-critical that certain restrictions are enforceable, seeking legal advice is the best course of action. The excitement of bringing on a ‘star performer’ can mask the difficulties than can lie ahead when employment relationships break down acrimoniously. PTRs are tricky and require a lot of tailoring. However, it is hugely expensive and damaging to get them wrong. Have solid post-termination restrictions to avoid certain post-termination pain.