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Tillman v Egon Zehnder Ltd: Supreme Court reviews restrictive covenants in UK employment contracts

The recent Supreme Court judgment in the case of Tillman v Egon Zehnder Ltd was the first time in nearly 100 years that the highest court in the UK has considered post-employment restrictions in a contract of employment. Could this ruling around restrictive covenants affect you and your business?

 

What are restrictive covenants?

Restrictive covenants generally appear in employment and commercial contracts and seek to prevent one of the parties to that contract from undertaking specific activities for a period of time after the contract has come to an end. In an employment context, the employer usually seeks to prevent the employee from engaging in activities which may compete for or with the business of the employer.

Restrictive covenants are generally void for being restraints of trade unless the employer can show that the restraint goes no further than is reasonable in order to protect the employer’s legitimate business interests.

 

What was Tillman v Egon Zehnder Ltd about?

Ms Tillman had a successful career in investment banking before joining Egon Zehnder Ltd (EZ), an executive search and recruitment company, as a consultant in 2004. Her role was to source candidates for high level posts in companies who were clients of EZ. Ms Tillman progressed well and by 2012 she has promoted to the role of Global Head of EZ’s Financial Services Practice. Financial services represented nearly a quarter of EZ’s global billings.

Ms Tillman’s original contract of employment contained a number of restrictive covenants which, in the event that she left the company, sought to prevent her from doing certain things for six months after her employment ended. Those restrictive covenants were not updated despite Ms Tillman being promoted to different roles over several years.

On 23 January 2017, Ms Tillman resigned with notice and EZ terminated her employment during the following week and paid her in lieu of the balance of the notice period. Ms Tillman then informed EZ that she wished to start work with another executive search company based in New York. In May 2017, EZ issued proceedings against Ms Tillman claiming that her new employment would amount to a breach of the restrictive covenant in her contract of employment which prevented her, for six months after leaving EZ, from being engaged or concerned or interested in any business which competes with EZ.

It was common ground that the other restrictions in the contract were binding but Ms Tillman argued that the non-compete clause was too wide as being ‘interested’ in a business prevented her from having a minor shareholding in a competing business for investment purposes.

At first instance, the High Court agreed with EZ and ruled that the non-compete clause was enforceable. The Court of Appeal subsequently overturned that it was impossible to say that a shareholder ‘was not interested’ in the business and so that clause was too wide. EZ then appealed to the Supreme Court which applied what is known as the ‘blue pencil test’ and ruled that the words ‘interested in‘ could be severed from the clause without impacting upon the effect of the remainder of covenant.

 

What does this mean for your business?

The Supreme Court’s ruling in Tillman v Egon Zehnder Ltd demonstrates that courts can take a practical approach to the drafting of restrictive covenants and remove problematic wording which could otherwise mean that the covenant is not enforceable. However, what the Courts cannot do is re-write the covenant in order to make it work, they can only sever existing words and even then, only if it does not impact upon the rest of the clause.

 

What should you be doing in relation to your restrictive covenants?

In recent years, there has been a clear increase in the number of clients wanting to enforce restrictive covenants in their contracts of employment. On such occasions, our advice is that the restrictions may not be enforceable, whether that be because the clause is too wide or in the event that the employee’s role has changed, meaning that the restrictions no longer ‘fit’ the new role.

Let us assist you by reviewing your restrictive covenants and assisting with the process of revising them to ensure that they best fit your particular requirements. For help and advice, please get in touch with Jonathan Dale, head of our employment law team, by emailing jonathan.dale@andrewjackson.co.uk or by calling 01482 325242.

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