Employment Law: Restrictive Covenants...Keeping it Reasonable
The starting point with restrictive covenants is that to be enforceable, they must be no wider than is reasonably necessary to protect an employer’s legitimate business interests. Therefore, they must be not so wide that it is not enforceable and not so narrow that it doesn’t do the job in putting a restriction on competition. Not easy to achieve.
To avoid restraint of trade, an employer must be able to demonstrate that there is a legitimate business interest that it is appropriate to protect, and that the protection the employer puts in place isn’t overly restrictive – in other words, it is reasonable when considering the interests of the employer, the employee and the public. A court would also look at whether it would be possible to achieve the same aim by using a lesser form of protection.
There are different types of clauses that might be included within an employment contract:
- Non-solicitation clauses aimed at preventing an employee who leaves your employment from contacting your customers.
- Non-poaching and non-employment covenants aim to protect the stability of your business by stopping an employee who leaves your organisation from poaching or employing other members of your staff. A non-poaching clause is likely to be more reasonable than non-employment which the Courts may view as limiting an employee from looking for work elsewhere.
- Non-dealing clauses are designed to prevent an employee who leaves your business from providing services or goods to your customers. This can also be difficult to enforce as it limits a customer’s choice in who they do business with, as well as restricting the employee.
- Non-compete clauses are designed to prevent your employee from going to work for one of your competitors or setting up their own business in competition with you, as soon as they leave your organisation.
In the recent case of Tillman v Egon Zehnder (EZ) Ltd., Tillman was employed by EZ and became Joint Global Practice Head. Her employment contract had five restraints, all of which were applicable for six months after termination of her contract and included clauses covering non-solicitation, non-dealing and confidentiality terms.
One of the restraints said that she could not ‘directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the business of the Company or any Group Company’ within 12-months of her termination date.
In 2007 Miss Tillman left EZ and went to work for a competitor, telling EZ that she would abide by the five covenants in her contract, apart from the non-compete one which she argued was unreasonably wide and not enforceable – she argued that even if she had a very small shareholding in a competitor organisation, she would still be in breach of the clause.
EZ then went on to seek an injunction to stop her moving to employment with the competitor. This was granted by the High Court, and Tillman appealed, saying that the words ‘interested in’ referred to being a shareholder, which Tillman was not. The Court refused to sever the words ‘interested in’ and found that the clause must be read as a whole and was an unreasonable restraint of trade.
EZ appealed and the Supreme Court ruled that the term ‘interested in’ did cover shareholding but determined that the words could be severed from the covenant, and that the rest of it was enforceable as the removal of these two words wouldn’t result in any significant change and the rest of the covenant would be unchanged.
What does this mean for businesses?
- Restrictive covenants will be void unless they protect an employer’s legitimate business interests such as confidential information and business connections.
- Including a clause that states the restriction does not prevent employees from holding shares in another company may help overcome any suggestion that a clause is too wide.
- It isn’t wise to rely on wider restrictive covenants in the hope that wording can be severed to support enforceability. Being reasonable in drafting any covenant is key to the individual being willing to sign the employment contact.
If you are needing support with drafting restrictive covenants or the interpretation and implementation of other areas of employment law, cHRysos HR is able to help with this.
cHRysos HR Solutions is a Doncaster based HR training and consultancy company providing CIPD and CMI accredited qualifications nationwide, as well as HR Consultancy to SMEs. For more information about how cHRysos HR can help you return to study and achieve further qualifications contact us on email@example.com or call +44 (0)1302 802128