Restrictive covenants what happens if they are unenforceable?

Employers often use restrictive covenants in employment contracts to ensure that their business is protected from the issues caused by an employee leaving to join a competitor. In the recent case of Tillman v Egon Zehner Ltd, the Supreme Court clarified that where parts of a restrictive covenant might be unreasonable and therefore unenforceable, the employer may still be able to rely on the rest of the clause.

Facts of the case

Ms Tillman worked for Egon Zehnder Ltd in the senior position of joint global head of the financial services practice group.

Within her contract of employment there was a clause which meant that that for six months after leaving the business she could not "directly or indirectly engage or be concerned or interested in any business” for a competitor of the company. This is known as a ‘non-compete’ clause.

She resigned from her employment and shortly afterwards informed the company that she intended to work for one of their competitors. The company went to court to obtain an injunction preventing her from starting the new role on the basis that she would be in breach of her contractual obligations.

Ms Tillman, however, argued that the restrictive covenants in her contract were unenforceable as they were too wide and went further than was needed to protect the company’s legitimate business interests. This was on the basis that the wording “or interested in” could be wide enough to mean that she was not be entitled to hold any shares in a competitor. It was argued that this was unreasonable, particularly because according to her contract, she was entitled to have a small shareholding in a competitor during her employment with the company.

Ms Tillman therefore argued that the whole clause should be set aside, despite the fact that she was not planning on owning any shares in a competitor, and had no desire to do so.

The High Court held that the clause was reasonable and enforceable; however on appeal the Court of Appeal found in favour of Ms Tillman on the basis that the restriction was too wide due to the possibility of prohibiting a small shareholding in another company. Egon Zehnder Ltd then appealed to the Supreme Court.

The decision

The Supreme Court decided that as currently drafted, the clause did represent an unreasonable restraint of trade, due to the fact that it prohibited the employee from owning any shares (even a very small number) in a competitor. This went further than was necessary to protect the company, especially given that she was not restricted from doing so during her employment.

However, the court decided that the restriction would still make sense if the phrase “or interested in” was removed from the clause. They decided to ‘strike-out’ this part of the restraint, but decided that the remaining part of the clause would still be enforceable.

As a result, the court decided that the rest of the restriction could be relied on by the company, and restored the injunction against Ms Tillman, meaning that she was not entitled to join a competitor of the company within six months of leaving employment.

Practice point

This will be a welcome decision for employers as it clarifies the position where a restrictive covenant contains a provision which is too wide; this will not necessarily mean that the whole restriction is invalid.

However, it does highlight that provisions which could mean that employees are prevented from holding shares in other companies might not be enforceable, as they could be considered to be an unreasonable restraint of trade.

The wording of any restriction needs to be considered in light of other clauses in the employee’s contract of employment.